IRA Charitable Rollovers for 2013
Owners of traditional IRAs and certain Roth IRAs who are over age 70 1/2 have an opportunity to make a gift of up to $100,000 to VMFA this year under the IRA charitable rollover provision included in The American Taxpayer Relief Act of 2012. A popular strategy is for IRA owners to gift their Required Minimum Distribution (RMD) amount. This convenient method of making a charitable gift will expire on December 31st unless Congress acts to extend this provision for 2014.
The IRA charitable rollover requires a direct transfer from your IRA Trustee or Administrator to a public charity such as VMFA. By using this technique, which the IRS calls a qualified charitable distribution or QCD, you avoid what would otherwise be a taxable distribution. To assist you in making this type of gift, VMFA’s Planned Giving Office has created a form letter that can be completed with your account information and mailed to your IRA Trustee or Administrator to initiate a charitable rollover. A second letter notifying VMFA of your incoming gift is also available. (See PDFs at right.)
The most frequently asked question about using the IRA charitable rollover is: Isn’t my income tax result the same whether I use the rollover technique or take a withdrawal from my IRA, add that amount to my taxable income for the year, gift the withdrawal to VMFA, and then take a corresponding charitable income tax deduction when I file my tax return?
Without considering any other information on your tax return, the answer is “yes.” Both strategies result in a zero tax consequence. However, you must consider your entire income tax situation. If you take a withdrawal from your IRA rather than use the rollover procedure, you will increase your adjusted gross income (AGI) by the amount of the withdrawal, which can trigger costly tax consequences. The following examples illustrate how using the IRA rollover procedure can avoid increasing your income tax liability and potentially save you a significant amount:
1) Use the rollover to avoid increasing your adjusted gross income: By using the rollover, the amount directly transferred to VMFA is not taken into income and, as such, will not increase your adjusted gross income (AGI). AGI is the most important number on your tax return as it helps determine eligibility for certain deductions, exemptions and tax credits. For those taxpayers over age 70 ½, a higher AGI may reduce or eliminate your ability to deduct medical expenses on Schedule A. If you are also a high income taxpayer subject to Pease limitations, a higher AGI may reduce certain itemized deductions as well as reduce or phase out your personal and dependency exemptions. A higher AGI may also result in more of your Social Security benefits being taxed and your Medicare premium rates being set higher. Various tax credits may be lost because your AGI exceeds their respective thresholds.
2) Use the rollover if you do not itemize your deductions: If you don’t itemize deductions and don’t use the rollover, the IRA withdrawal must be taken into income with no ability to take an offsetting deduction thus increasing your federal tax liability.
3) Use the rollover if you made large cash gifts to public charities this year and your deduction will be limited to 50% of your AGI. Not many donors fall into this category, but if you are one of them, remember that by using the rollover procedure to make a charitable gift, the 50% AGI cap simply doesn’t apply.
Remember, the gift transfer must be postmarked by December 31st or received by December 31st if sent as a wire transfer. If you are considering this type of charitable gift, contact your IRA Trustee or Administrator well before the end of the year to ensure that you meet these deadlines.
VMFA does not provide tax, legal, accounting or other professional advice to donors or prospective donors. Please contact your own professional advisor should you have questions before making a gift.