In 2018, fewer people will itemize their deductions because the standard deduction is now $24,000 for a married couple, and because the deductibility of state and local tax on the federal income tax return is limited to a maximum of $10,000.
This new income tax landscape makes certain charitable giving concepts more powerful than ever. One of these is the direct charitable IRA rollover available to individuals aged 70.5 or older who are required to take minimum distributions from their retirement accounts. The direct charitable IRA rollover doesn’t require a taxpayer to itemize and can be used even if the taxpayer claims the standard deduction. Also, it can be structured to generate Endow Iowa state income tax credits valued at 25% of the rolled-over funds.
It works like this: If an individual (who is aged 70.5 or older) directs his or her traditional IRA to distribute up to $100,000 to certain qualified charities, she may exclude this amount from her gross income. This distribution amount counts towards any IRA minimum distribution requirements, and the amount distributed is not reportable income on the donor’s income tax return. 401k and 403(b) plans cannot make direct charitable roll-overs, but such plans can be rolled over into an IRA, and that new IRA can be used to make qualifying charitable rollovers.
Because the amount directly distributed from an IRA to a qualified charity is entirely excluded from the participant’s taxable income, this tool isn’t limited to any percent of the taxpayer’s adjusted gross income, and a charitable rollover doesn’t impact the amount of additional gifts that can be deducted by the taxpayer. So, for example, a taxpayer can take advantage of the charitable IRA rollover even if the taxpayer has no other taxable income. Moreover, a taxpayer who takes advantage of the charitable IRA rollover may make additional cash donations to public charities up to 60% of such taxpayer’s adjusted gross income (or qualified non-cash property up to 30% of such taxpayer’s adjusted gross income). In the alternative, a person who wouldn’t otherwise itemize can take advantage of a direct charitable IRA rollover without forfeiting the standard deduction.
For the IRA rollover to qualify as a direct charitable IRA rollover, the distribution must be made directly from the IRA trustee or custodian to a publicly supported charity. Qualified charities are delineated in 26 U.S.C. § 170 and include churches, various educational establishments, certain medical institutions, and many other organizations. However, gifts to donor advised funds (described in IRC § 4966(d)(2)), supporting organizations, and private foundations do not qualify. It is important to ascertain the character of the donee organization before consummating the rollover to make sure it qualifies. For example, a gift to a hospital may qualify, but a gift to the Hospital’s endowment foundation may not qualify if the endowment foundation is organized as a supporting organization. An Endowed fund for an Iowa hospital held at an Iowa Community Foundation would qualify for a direct charitable IRA rollover and state income tax credits for the donor equal to 25% of the rolled-over funds. For this reason, endowed funds for specified Iowa non-profits held at Iowa Community Foundations may in many cases be the optimal donee for a direct charitable IRA rollover.
For example, a $100,000 rollover by an individual older than 70.5 years to a named endowed fund for the local United Way held at the Greater Cedar Rapids Community Foundation would escape federal income tax and would potentially generate $25,000 in Iowa income tax credits. That fund would pay 4.5% or 5% to the United Way in perpetuity. If the Donor had no other reason to itemize his or her deductions, the donor could still receive the $24,000 standard deduction for the year of the rollover.
Unfortunately, 2018 Endow Iowa credits are almost used up, but unless the Iowa Legislature does something to curtail the program, 2018 rollovers to Endow Iowa funds at Iowa Community Foundations should qualify for 2019 Endow Iowa credits, until those credits are also exhausted.
The ability to obtain Endow Iowa credits while excluding the IRA rollover from taxable income is a significant opportunity to Iowans over age 70.5. This is especially true for qualifying individuals who support one or more Iowa non-profits but don’t have $24,000 in itemized deductions aside from charitable gifts. Every situation is unique, and it is important to talk to advisors before proceeding with any planned gift, but for many older Iowans, this opportunity will be worth serious consideration in 2018.
Questions relating to this article can be directed to our estate planning practice attorneys.