Encouraging Clients to Take Advantage of the Tax-Free IRA Charitable Rollover

By Lawrence Pon, CPA/PFS, CFP, EA, USTCP, Pon & Associates

Additionally, the provision may not be with us next year pending Senate approval of its amendment, the Public Good IRA Rollover Act of 2007. Therefore, there needs to be sense of urgency to remind clients about this unique opportunity before year-end.

The Pension Protection Act of 2006 allows individuals to distribute up to $100,000 directly from an IRA to a qualifying charity without having to claim it as a taxable distribution during the year the contribution is made. This rollover is available for individuals who are 70½ or older on the gift date, and the gift must be made by December 31, 2007.

Why is this so beneficial?

• This distribution can help fulfill the Required Minimum Distribution RMD requirement. This is ideal for clients who do not need the money from an RMD or cannot spend all their RMD. If their RMD is less than $100,000, they can still rollover $100,000 and it would help reduce the future RMDs.
• This distribution will reduce future Income with Respect to Decedent. This reduces the amount that would be taxable to the beneficiaries of the traditional IRA.
• This distribution reduces the taxable estate without increasing tax liability. Although the law allows for distributions from a Roth IRA, distributions should be taken from a traditional deductible IRA for the most benefit.
• If clients do not itemize their deductions (they only qualify for the standard deduction), they can contribute to their favorite charities without increasing their tax liabilities.

If this law did not exist, a client would report the distribution as taxable income, but they may not have enough itemized deductions to claim an offsetting income tax deduction. However, with the IRA charitable rollover, the distribution is not taxable to the client and therefore there would be no increase in tax liability. Many older clients do not itemize and this can make a lot of sense for clients located in states with no income tax.

• The IRA charitable rollover will help donors avoid losing tax deductions due to Adjusted Gross Income (AGI) increases. Examples of this include:
•  The 2% phase-out of itemized deductions when income increases over $150,500 (married filing jointly).
• The phase-out of dependent and personal exemption deductions.
• Reduced income tax on Social Security payments.
• Other deductions that phase out as AGI increases – 2% for miscellaneous itemized deductions, 7.5% for medical expense deductions, 10% for non-business casualty losses and limitations on losses from rental real estate.
• Clients who are subject to the 50% annual charitable deduction limitation or have charitable contribution carryovers can benefit from the IRA charitable rollover. The IRA charitable rollover is not a charitable itemized deduction so the contribution will not be limited due to the 50% of AGI limitation.   
• Most importantly, clients can accomplish charitable planning goals at a great tax benefit.

As of August 30, 2007, the National Committee on Planned Giving has tracked more than $102 million in dollar value of gifts reported. The average distribution is $17,690 with a median distribution of $5,000. The most common distribution is $1,000.  Public and private universities account for over half of the distributions. If you have assisted a client in an IRA distribution to charity, you can report it here: https://websurveyor.net/wsb.dll/24399/hr4survey.htm

Click here to see the updated NCPG survey:  http://www.ncpg.org/gov_relations/NCPG%20IRA%20survey--general%20results%20_8-30-07_.pdf

About Lawrence Pon

Lawrence Pon is a certified public accountant, personal financial specialist, certified financial planner, enrolled agent and U.S. Tax Court practitioner. He has been providing tax and accounting services to small businesses and individuals for the past 22 years. He speaks regularly to groups about tax, financial and estate planning.  His articles and tax tips have appeared in the New York Times, San Francisco Chronicle, San Francisco Examiner, San Jose Mercury News and Money Magazine. He is also the co-author of Giving: Philanthropy for Everyone, published by Quantum Press in 2002 and Love, Money & Control: Reinventing Estate Planning, published by Quantum Press in 2004.

Lawrence received his bachelor’s of science in business administration from the University of California, Berkeley and master’s of science in Taxation from Golden Gate University in San Francisco.