What should I do this year when Congress hasn’t extended that “Charitable IRA Rollover law” that lets me donate money to charities directly from my individual retirement account?
I want to give money from my IRA to a charity right now, but the bank that has my IRA refuses to cut a check to the charity until the law is extended.
Hopefully by the time you read this article, Congress will have enacted legislation that extends the law that permits individuals to make charitable gifts directly from their IRAs. But, if Congress behaves in 2014 as it has in past years, the extension of the law is still uncertain, and you’re hearing comments like these from your clients.
Internal Revenue Code Section 408(d)(8)(A) (the “Charitable IRA Rollover law”) permits individuals over the age of 70½ to make charitable gifts directly from their IRAs to eligible charities and exclude the distributions from their gross income. The price: There’s no itemized charitable income tax deduction for such an IRA gift. Many taxpayers, as illustrated in “Winners & Losers,” p. 42, are better off excluding IRA distributions from their income than claiming itemized income tax deductions for their charitable gifts.
The Charitable IRA Rollover law is one of 55 tax laws (commonly referred to as “the extenders”) that expired on Dec. 31, 2013. In fact, 2014 marks the fourth time that this temporary law has expired. There are proposals to extend the law into 2014.
Typically, when there’s a tax bill pending in Congress that could reduce a client’s tax liability, the best advice to give the client is: Don’t make the transaction until the proposed bill is actually enacted into law. The Charitable IRA Rollover law is an exception. Donors over age 70½ can safely make certain charitable gifts from their IRAs in 2014 even though the law hasn’t yet been extended into 2014. As demonstrated below, these donors won’t be worse off than if they had waited for Congress to act. Furthermore, IRA administrators should be aware that there’s no legal impediment that prevents them from issuing a check from a client’s IRA to a charity before the law is extended.
That said, charitable gifts from IRAs are best advised when they provide a taxpayer with greater tax savings than an alternative charitable gift of cash or property. If the IRA gift doesn’t provide greater savings, then it isn’t worth the extra effort compared to a conventional gift. Furthermore, the gift from the IRA to the charity must meet specific legal requirements to qualify for the favorable tax treatment. (See “What’s a Charitable IRA Rollover?” p. 43.)
Why Act Now?
Charities need resources throughout the year, not just in December. A donor can safely make certain charitable gifts from an IRA at any time in 2014, even before Congress acts. Which gifts? Charitable gifts that the donor will make regardless of whether the Charitable IRA Rollover law will be changed and in an amount that’s less than the required minimum distribution (RMD) for the year.
A brief history lesson is illustrative. The Charitable IRA Rollover law was enacted in August 2006 as a temporary tax provision that, along with many other tax extenders, expired at the end of 2007. In those even-numbered years when the law expired (2008, 2010 and 2012), Congress retroactively extended the law back to the beginning of the year. That is, Congress granted the favorable tax treatment for all eligible IRA gifts made at any time during those even-numbered years and then granted an additional one year extension into the next odd-numbered years (2009, 2011 and 2013, respectively). How promptly did Congress act? The retroactive legislation was enacted on Oct. 3, 2008, Dec. 17, 2010 and Jan. 1, 2013, respectively.
The 2010 and 2012 legislations proved especially challenging for a “wait until the law is enacted” strategy. IRA administrators need a reasonable amount of time to process a donor’s IRA distribution request. Congress’ delay in extending the laws significantly reduced the number and amount of gifts that charities received from IRAs in 2010 and 2012. One Kansas City charity reported the following number and amount of donations from IRAs in the years 2010 through 2013:
Number of IRA Dollars
Year Donors Donated ($)
2010 11 21,516
2011 102 276,216
2012 17 49,538
2013 129 702,405
A critical factor for planning charitable gifts from IRAs is that IRA account owners over the age of 70½ are required to receive RMDs from their IRAs every year.1 Failure to receive the minimum annual distribution triggers a 50 percent penalty tax in that year.2 A major incentive for making charitable gifts from an IRA is that such charitable gifts count toward satisfying the RMD requirement for the year.3
So, what would be good advice in 2014 for a donor who can save taxes with the Charitable IRA Rollover law? First, ask the donor to identify those charitable gifts that the donor will make whether or not the law is extended. Many people donate something to charities, even when there’s no tax saving because they care about the mission and the purpose. Second, warn the donor that you can’t guarantee anything. Third, suggest that the donor consider making those gifts from an IRA in 2014, up to the amount of the RMD (and not in excess of the $100,000 annual limit for charitable IRA gifts). Why? Because: (1) those gifts are definitely going to be made in 2014, and (2) the RMD must also occur in 2014. If Congress behaves as it has in 2008, 2010 and 2012, it will retroactively extend the law for all gifts made during the year. And, even if it doesn’t, those gifts were going to be made anyway.
Example: Mr. Donor says: “My RMD for the year is $30,000. I’m definitely going to give $3,000 to charities this year. I would give an extra $2,000 to charities if that Charitable IRA Rollover law were extended into 2014.” Go ahead, Mr. Donor. Give the $3,000 to charities in 2014 from your IRA. You’re going to make those gifts regardless of any change to the IRA laws. And, you have to take more than that amount out for your RMD. Charities need resources throughout the year and will appreciate your action. But, wait until the law is extended to give the extra $2,000 from your IRA. You would’ve been a winner in 2008, 2010 and 2012 with this strategy. But good luck—in 2012, Congress didn’t vote to approve the retroactive law until Jan. 1, 2013.
“But my IRA administrator says that the law prohibits issuing a check from my IRA to a charity before the law is extended.” I’ve heard comments like this from frustrated donors in every even-numbered year that Congress has failed to extend the Charitable IRA Rollover law. The IRA administrator’s statement is incorrect. There’s no legal obstacle that prevents issuing a check from an IRA to a charity before the law is extended.
The problem is usually resolved by sending the IRA administrator a copy of IRS Notice 2007-7. In that notice, the IRS addressed many of the technical issues of the Charitable IRA Rollover law shortly after it was enacted in August 2006. The IRS stated in Q&A 38 that a donor who made an eligible gift from an IRA to a charity at any time during 2006 would be able to claim the favorable tax treatment.4If an IRA gift to a charity could be made before the law was enacted for the very first time in 2006, then such a gift can definitely be made in a later year before the law is merely extended.
This advice is bolstered by the fact that the IRA administrator has no duty to investigate whether the recipient organization is an eligible charity. The donor might request a check to be issued from his IRA to an organization that doesn’t qualify as an IRC Section 501(c)(3) charity, such as a Section 501(c)(4) social welfare organization or a Section 501(c)(6) trade association. It’s not a problem for the IRA administrator. His duty is to add up all of the checks that were issued that year from that IRA (no matter who the check was made out to) and then report to both the IRA account owner and to the IRS on Form 1099-R the total amount of distributions that year. As is the case with conventional gifts of cash, the legal burden falls on the donor to correctly identify which organizations qualify as charities and which don’t. There’s no code on Form 1099-R for these charitable distributions. Instead, the IRA account owner claims the exclusion for the qualified charitable distributions on the front page of Form 1040, as described in “What’s a Charitable IRA Rollover?” p. 43.
It’s unfortunate that taxpayers were kept in suspense about whether the extenders would be enacted until December 2010 and December 2012. Perhaps Congress will act more responsibly in 2014. Regardless of whether Congress acts promptly, donors over age 70½ can still make charitable gifts from their IRAs in 2014 and in future years before the law is extended. Whether it makes sense to do this depends on whether the donor gets tax savings from the IRA charitable gift. And, when making charitable gifts from an IRA before the law has been extended, the donor should be certain to meet all of the legal requirements so that the gift will qualify for charitable IRA rollover treatment, if Congress retroactively extends the law.
1. Internal Revenue Code Section 4974.
2. Internal Revenue Service Notice 2007-7; 2007-5 IRB 1, Q&A 42.
3. The full text of IRS Notice 2007-7; 2007-5 IRB 1, Q&A 38 is:
Q-38. If a 2006 distribution satisfies all the requirements under § 408(d)(8),
but it was made before August 17, 2006 (the date PPA ’06 was enacted), is the amount distributed excludable as a qualified charitable distribution? A-38. Yes. Section 408(d)(8) is applicable to distributions made at any time in 2006. Thus, a distribution made in 2006 that satisfies the requirements under § 408(d)(8) is a qualified charitable distribution even if it was made before August 17, 2006.