IRA Charitable Rollovers During Legislative Limbo

IRA Charitable Rollovers During Legislative Limbo

The IRA charitable rollover provision expired last year but could be reinstated retroactively, raising uncertainity in planning for 2014 IRA distributions.
Article posted in Retirement Plans on 5 September 2014| comments
audience: National Publication, Richard L. Fox, Esq. | last updated: 10 September 2014
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Summary

The Charitable IRA has been a popular, albeit elusive planning tool. Nothing has changed currently. The option has still not been renewed by the IRS and uncertainty remains as to whether it will be. This makes planning a real challenge. Richard Fox offers cautionary guidance on this complex issue.

by Richard Fox, originally published in Estate Planning Journal

Planning Tips

Since its enactment as a two-year temporary measure in 2006, the IRA charitable rollover provision has been extended by Congress in two-year increments through 12/31/2013. Congress has yet to take any action to extend the provision further, leaving both charities and taxpayers alike in the dark regarding its availability for 2014. Until Congress acts, taxpayers should proceed with caution during the remainder of the year.

The ever-popular individual retirement account  (IRA) charitable rollover provision provides an annual exclusion from gross income up to $100,000 for “qualified charitable distributions” from an IRA, thereby removing the multitude of potential negative tax drawbacks traditionally associated with funding lifetime charitable contributions with IRA withdrawals, to the extent of $100,000 per year.1 Although it was originally enacted only as a temporary measure in 2006, originally set to expire on 12/31/2007, each time the IRA charitable rollover provision has expired, Congress has extended the provision in two-year increments, although it has never been made permanent. To the chagrin of donors and charities alike, however, Congress has never extended the provision before it has actually expired at the end of each two-year interval.

Instead, the provision has always been extended well after its expiration date, albeit on a retroactive basis. That sequence has left donors and charities in the dark as to whether the IRA charitable rollover provision would ultimately be available during the tax year after its expiration. For example, the last time the IRA charitable rollover provision expired was on 12/31/2011. The provision was subsequently retroactively reinstated to 1/1/2012, but not until the enactment of the American Taxpayer Relief Act of 2012 (ATRA), which was not signed into law by President Obama until 1/2/2013.2 Thus, although it was ultimately restated as of 1/1/2012, donors and charities went through all of 2012 without knowing whether the IRA charitable rollover provision would be in effect for that year.

This type of congressional action obviously creates difficulties in planning for the use of the IRA charitable rollover provision. It also detracts from any otherwise very favorable charitable-giving incentive, as donors are much more inclined to donate funds from their IRAs to charity while this provision is actually in effect.

For instance, according to a paper issued by the Independent Sector, entitled “Extend the IRA Charitable Rollover,” in the first two years the IRA charitable rollover provision was in effect, “more than $140 million was donated from IRAs  to support the work of public charities across the U.S.” In a 6/25/2007 article in InvestmentNews.com, entitled “IRA Wrinkle in Tax Law a Boon to Charities,” it was reported that based on a survey conducted by the National Committee on Planned Giving, IRA owners had contributed at least $75 million to charitable organizations from IRAs. These contributions, the article notes, were the result of the IRA charitable rollover provision. According to the article, of the organizations that reported data, public universities received 32.1% of the total, private universities 27.5%, and small colleges 9.8%. Also receiving donations were hospitals, religious organizations, social services, museums, and other non-profit groups.

The article notes that Harvard University had received $4 million in contributions as a result of IRA charitable rollovers, with the head of its planned giving stating that “[t]his has enabled donors to make larger gifts. I know people have provisions in place for future gifts and decided to do something now versus later because they could tap their IRAs.”

Nonetheless, the IRA charitable rollover provision has yet to be extended beyond the year 2013 and, therefore, is currently not available for 2014. Given the track record of Congress and bills that have been recently introduced, it is quite likely that this highly favorable and popular charitable giving provision will be retroactively reinstated to 1/1/2014, either as a temporary or permanent measure. 3 Until Congress acts, however, taxpayers and charities have no assurance regarding the availability of the provision for the year 2014, and congressional action for any such reinstatement is not likely to occur at this point until after the November mid-term election. This article discusses how Congress has previously approached the extension of the IRA charitable rollover provision following its expiration and how, in light of such approach, taxpayers should proceed for the remainder of 2014 pending congressional action.

Background on IRA charitable rollover provision

The IRA charitable rollover provision brought about by the PPA, contained in Section 408(d)(8), provides an annual exclusion from gross income up to $100,000 for “qualified charitable distributions” from an IRA. 4 Thus, individuals qualifying for IRA charitable rollover treatment (who must have reached age 70 ½) wishing to make distributions from an IRA to charity can do so, to the extent of $100,000 per year, without the risk of any tax burden.

Per individual limit. A taxpayer who owns and maintains multiple IRAs in a tax year may make qualified charitable distributions from more than one of these IRAs. The maximum total amount that may be excluded for that year by the IRA owner, however, is $100,000. For married individuals filing a joint return, the limit is $100,000 per individual IRA owner. 5

No double deduction. Of course, because it is excluded from gross income, a qualified charitable distribution from an IRA does not qualify for a charitable income tax deduction; otherwise, there would be the double benefit of gross income exclusion and a charitable income tax deduction.

Reporting requirement. An IRA custodian reports all distributions from an IRA to both the IRA owner and to the IRS, including those made directly from the IRA to charity. According to the Form 1040 Instructions, the IRA owner then reports all of the distributions on line 15a of Form 1040, but only the taxable distributions on line 15b. Therefore, the charitable IRA gross income exclusion will be reported in a manner similar to a traditional rollover, where a person may have received a taxable distribution from a retirement account but avoids any imposition of income tax by rolling over the amount within 60 days to an IRA.

Required distributions. A qualified charitable distribution is taken into account for purposes of the annual required minimum distribution (RMD) requirement to the same extent the distribution would have been taken into account under such rules had the distribution been made to the account holder. Thus, charitable contributions from an IRA to charity count toward satisfying a participant's RMD requirement for the year. 6 As a result, a donor can satisfy his or her annual RMD requirement by donating funds from his or her IRA to charity and, up to $100,000, such amount is excluded from gross income.

This treatment of having a charitable distribution count as an RMD should apply even if the IRA charitable rollover provision is not in effect. According to IRS guidance, a transfer from an IRA to charity not qualifying for the charitable rollover provision is treated as a distribution to the IRA owner and, then, a contribution by the IRA  owner to charity. 7

Statutory requirements for a qualified charitable distribution

There are six basic requirements for an IRA distribution to qualify as a “qualified charitable distribution” under the IRA charitable rollover provision:

    (1) The distribution must be made for only an IRA.

    (2) The recipient must be an eligible charitable organization.

    (3) The IRA owner must be at least age 70 ½.

    (4) The distribution must be made directly to charity.

    (5) The distribution must otherwise be fully deductible as a charitable contribution.

    (6) The distribution must otherwise be included in gross income.

These requirements are discussed in more detail below. If an amount intended to be a qualified charitable distribution is paid to a charitable organization but fails to satisfy the requirements of Section 408(d)(8), the amount paid is treated as (1) a distribution from the IRA to the IRA owner that is includable in gross income under the rules of Section 408 or 408A, as applicable, and (2) a contribution from the IRA owner to the charitable organization that is subject to the rules under Section 170 (including the percentage limits of Section 170(b)). 8

Following its enactment in 2006, the requirements for meeting the IRA charitable rollover provision were actually the subject of much confusion, 9 although that confusion was generally eliminated upon the IRS issuing Notice 2007-7, 10 which provides specific guidance in the form of questions and answers with respect to the various IRA charitable rollover provision requirements.

IRAs only. The distribution must be made only from an IRA. 11 For this purpose, Simplified Employee Plans (SEPs) and Savings Incentive Match Plans for Employees (SIMPLE plans), which are basically IRAs that receive employer contributions, as well as Sections 403(b) and 401(k) plans, profit-sharing plans, and pension plans, do not qualify under the IRA charitable rollover provision.

Many individuals over 70 ½ years old have large IRA balances attributable to rollovers from retirement accounts maintained at their former employers, which can be used to make distributions to charity. Where applicable, individuals over 70 ½ years old who do not have IRAs can take advantage of the IRA charitable rollover provision by, for example, transferring funds from an existing Section 401(k) plan into a newly established IRA.

Generally, the exclusion for qualified charitable distributions is available for distributions from any type of IRA  (including a Roth IRA described in Section 408A and a deemed IRA described in Section 408(q)) that is neither an ongoing SEP IRA described in Section 408(k) nor an ongoing SIMPLE IRA described in Section 408(p). 12 For this purpose, a SEP IRA or a SIMPLE IRA is treated as ongoing if it is maintained under an employer arrangement under which an employer contribution is made for the plan year ending with or within the IRA owner's tax year in which the charitable contributions would be made. 13

Eligible charitable recipients. The recipient organization must be described in Section 170(b)(1)(A), which generally includes organizations commonly referred to as “public charities,” such as churches, hospitals, museums, and educational organizations. 14 Donor-advised funds operated by public charities, and supporting organizations, while described in Section 170(b)(1)(A), are specifically excluded as eligible recipients of IRA charitable rollover distributions, so that distributions from IRAs to such entities, including, for example, a donor-advised fund sponsored by a community foundation or a hospital foundation formed as a supporting organization, do not constitute qualified charitable distributions. 15 Also excluded are split-interest trusts, such as charitable remainder and lead trusts, and private nonoperating foundations, as such entities are not described in Section 170(b)(1)(A).

IRA owner must be at least age 70 ½. The distribution must be made on or after the date that the IRA holder attains age 70 ½. 16 Similarly, the exclusion from gross income for qualified charitable distributions is available for distributions from an IRA maintained for the benefit of a beneficiary after the death of the IRA owner if the beneficiary has attained age 70 ½ before the distribution is made. 17

Distributions must be made directly to charity. The distribution from the IRA to the charity must be made “directly by the trustee,” such that the distribution must be made payable directly from the IRA to the charity. 18 If a check is made payable to the IRA owner and then endorsed over to the charity, it will not qualify. Where, however, a check from an IRA is made payable to a qualified charitable organization and delivered by the IRA owner to the charitable organization, the payment to the charitable organization will be considered a direct payment by the IRA trustee to the charitable organization. 19

A distribution to a charity will qualify as a qualified charitable distribution only if the “entire distribution would be allowable under section 170” as a charitable deduction. 20 Thus, any quid pro quo benefit received by the account holder in return for the distribution, such as the fair market value of a dinner or other benefit that is not disregarded under Section 170, disqualifies the entire distribution, not just the benefit portion, from IRA charitable rollover treatment.

The requirement that the entire distribution be allowable as a charitable deduction also prevents the funding of a pooled income fund or a charitable gift annuity from an IRA from being considered a qualified charitable distribution, notwithstanding that the charity receiving the distribution is a public charity under Section 170(b)(1)(A).

Further, under Section 170(f)(8), no charitable deduction is allowed for any contribution of $250 or more, unless the donor obtains a contemporaneous written acknowledgement, which must disclose the value of any goods or services provided by the charity in return for the contribution. Thus, to constitute a qualified charitable distribution, the donor must obtain a written acknowledgement indicating that no goods or services were received in return for the contribution. When making a distribution from an IRA for which charitable rollover treatment is sought, donors will be best served by first advising the charity that:

  1. A distribution will be made from the donor's IRA to the charity, which is intended to constitute a “qualified charitable distribution” under Section 408(d)(8).
  2. No goods, services, or benefits of any kind are to be provided by the charity to the donor or any other party in consideration for the distribution.
  3. Upon its receipt of the distribution, the charity must provide an acknowledgement to the donor, acknowledging the amount of the distribution and that no goods, services, or benefits of any kind were or will be provided to the donor or any other party in consideration for the distribution from the IRA.

Distribution must otherwise be included in gross income. A distribution to charity from an IRA will qualify as a qualified charitable distribution only to the extent that the distribution would have otherwise been included in the account owner's gross income if such distribution had been withdrawn. 21 Thus, only the taxable portion of any IRA distribution can qualify as a qualified charitable distribution.

Of course, where a nontaxable distribution is made to a charity from an IRA, the account holder would not be subject to tax on the distribution (as such amount is not included in gross income), but would also be entitled to a charitable income tax deduction under Section 170(a). This would be the case, for example, with a Roth IRA, where a distribution that would otherwise not be taxable, as is generally the case, is distributed directly to charity. Where, however, a distribution from a Roth IRA would be taxable because it is made within the five-tax-year period, the distribution can be a qualified charitable distribution provided all other requirements for such treatment are met, including the donor having attained age 70 ½. Under a special and favorable rule under the charitable rollover provision, distributions from an IRA to charity are deemed to come first from the taxable portion of the IRA, thereby maximizing the tax-free dollars left behind. 22

Example. Blake, who is age 75, has an IRA with a balance of $100,000, consisting solely of deductible contributions and earnings. The entire IRA balance is distributed directly to an organization described in Section 170(b)(1)(A) that is not a donor-advised fund or a supporting organization, for which Blake receives no benefit in return. But for the IRA charitable rollover provision, the entire distribution of $100,000 would be includable in Blake's gross income. Accordingly, under the IRA charitable rollover provision, the entire distribution of $100,000 is a qualified charitable distribution. No amount is included in Blake's gross income as a result of the distribution, and the distribution is not taken into account in determining the amount of Blake's charitable deduction for the year.

Example. Jeffrey is also age 75 and has an IRA with a balance of $100,000. His IRA consists of $20,000 of nondeductible contributions and $80,000 of deductible contributions and earnings. In a distribution to an organization described in Section 170(b)(1)(A) that is not a donor-advised fund or supporting organization, $80,000 is directly distributed from the IRA, for which Jeffrey receives no benefit. But for the IRA charitable rollover provision, a portion of the distribution from the IRA would be treated as a nontaxable return of nondeductible contributions. The nontaxable portion of the distribution would be $16,000, determined by multiplying the amount of the distribution ($80,000) by the ratio of the nondeductible contributions to the account balance ($20,000/$100,000). Accordingly:

  • Under pre-IRA charitable rollover law, $64,000 of the distribution ($80,000 minus $16,000) would be includable in Jeffrey's income.
  • Under the IRA charitable rollover provision, notwithstanding the pre-IRA charitable rollover tax treatment of IRA distributions, the distribution is treated as consisting of income first, up to the total amount that would be includable in gross income (but for the IRA charitable rollover provision) if all amounts were distributed from the IRA. The total amount that would be includable in income if all amounts were distributed from the IRA is $80,000.

Thus, the entire $80,000 distributed to the charitable organization on Jeffrey's behalf is treated as includable in income and is a qualified charitable distribution. No amount is included in Jeffrey's income as a result of the distribution, and the distribution is not taken into account in determining Jeffrey's charitable deduction for the year. In addition, the $20,000 remaining balance in the IRA is treated as Jeffrey's nondeductible contributions.

History of retroactive extensions

The IRA charitable rollover provision was brought about by the PPA only as a temporary measure, retroactive to tax years beginning after 12/31/2005, and was set to expire on 12/31/2007. 23 Over the years, however, legislation has been enacted to extend this temporary measure, but it has never been made permanent. The first time the provision expired, i.e., on 12/31/2007, it was extended until 12/31/2009 under the Emergency Economic Stabilization Act of 2008, signed by President Bush on 10/3/2008, and was retroactive to 1/1/2008. Thus, the first time the provision was retroactively extended was on October 3 in the year following its expiration, thus giving taxpayers nearly three full months' notice before the end of 2008 that the provision would be available for the tax year 2008, as well as for the tax year 2009.

As discussed below, extensions of the provision after 12/31/2009 were not made until nearly the very end of the year following the expiration of the provision or, even worse, in the year after the year following the expiration of the provision. Because the provisions were retroactively reinstated at such a late stage and in an attempt to ameliorate its procrastination, Congress enacted special transitional relief provisions aimed at broadening the applicability of the provision for the year, although for many taxpayers such relief provisions were too little too late.

2009 expiration and retroactive reinstatement

In 2010, the IRA charitable rollover provision, which had expired on 12/31/2009, was reinstated and signed into law by President Obama on 12/17/2010 under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Job Creation Act of 2010). The legislation reinstated the IRA charitable rollover for two years through 12/31/2011, retroactive to 1/1/2010. Because the legislation was enacted virtually at the end of 2010, Congress determined that the time necessary to make IRA charitable rollover transfers for 2010 should be extended for one additional month. Thus, an otherwise eligible distribution made at any time during 2010 or through 1/31/2011 could be treated as a qualified IRA charitable rollover for the year 2010. Those taxpayers who had not taken their RMDs for 2010 were allowed to have charitable rollovers made through 1/31/2011 treated as if made in 2010.

One question that arose as a result of the extension of the IRA charitable rollover provision so late in 2010 was whether those individuals who had already taken their 2010 RMD could return their 2010 payouts to the IRA in order to then make direct charitable distributions from the IRA by 1/31/2011. According to a 1/5/2011 statement by the IRS, and to the upset of donors and charities alike, the answer was no, as the IRS stated that such rollovers and reclassifications simply do not work. IRS spokesperson Eric Smith stated unequivocally that “[RMDs] from an IRA received by a taxpayer cannot be rolled over to an IRA.”

Many taxpayers were angered by this result, saying it took lawmakers too long to extend the provisions. After waiting virtually an entire year, many simply took their RMDs or made donations from taxable sources. After the extension was ultimately permitted so late in 2010, many felt they should have been able to roll back into an IRA the payouts they took under the assumption the extension would not occur. However, the IRS responded to this claim by saying that it did not have the authority to allow taxpayers to roll back their payouts into the IRA and then make the charitable donation, as only Congress has that authority.

2011 expiration and retroactive reinstatement

Under ATRA, which President Obama signed into law on 1/2/2013, the IRA charitable rollover provision, which had expired on 12/31/2011, was extended retroactively to 1/1/2012 through 12/31/2013. Thus, individuals having made an otherwise qualified IRA charitable rollover at any time during the tax year 2012 were able to obtain the benefits of the IRA charitable rollover provision for that year, as the IRA charitable rollover provision was considered to have been in effect for the entire 2012 tax year. Many individuals, in anticipation of the IRA charitable rollover being reinstated retroactively (or based on the mere possibility of its retroactive reinstatement) made direct distributions from their IRAs to charity during 2012 and, therefore, were able to obtain the benefits of the IRA charitable rollover provision for that year. Because the legislation was not enacted until 1/2/2013, Congress included two special transitional relief provisions to allow certain payments to charity made in January 2013 to count as being made in 2012, as described below.

Special election for December 2012 IRA distributions contributed to eligible charity in January 2013. Under a special rule, for purposes of both (1) the tax-free qualified charitable distribution rules, and (2) the RMD rules as they apply to IRAs, any portion of an IRA distribution made to a taxpayer during December 2012 (i.e., after 11/30/2012 and before 1/1/2013) may be treated as a qualified charitable distribution if the IRA owner so elects to the extent that the portion is both:

  1. Transferred in cash after the distribution to an eligible charity before 2/1/2013.
  2. The distribution would otherwise satisfy the tax-free qualified charitable distribution rules, but for the fact that the distribution was not transferred directly from the IRA to an eligible charity.

This special election for December 2012 distributions provided a limited exception to the general rule that charitable transfers must be made by the IRA trustee directly to an eligible charity.

Example. Peter is an individual who is over age 70 1/2, and the owner of a traditional IRA . On 12/12/2012, Peter received a $75,000 distribution from the IRA in satisfaction of his RMD for 2012. Under the special rule for December 2012 distributions, Peter could have elected to transfer to an eligible charity any amount of cash up to $75,000 (the amount of his 2012 RMD), and the amount transferred would have been treated as a tax-free qualified charitable distribution, as long as Peter made the charitable transfer no later than 1/31/2013. Peter would still be considered to have satisfied his 2012 RMD regardless of the amount of the charitable transfer.

As indicated above, this special election applied to distributions from an IRA received only during the month of December 2012. Distributions received in 2012, but prior to 12/1/2012, were not eligible for this special relief. The transitional relief under this provision, albeit including distributions received only in December 2012, was still better than the extension legislation under the Job Creation Act of 2010 (retroactively reinstating the IRA charitable rollover provision to 1/1/2010), which (as discussed above) did not allow any distributions received in 2010 (even in December 2010) to qualify for IRA charitable rollover treatment under any circumstances. Under this special relief provision, unlike the rules otherwise applicable to IRA charitable rollovers, there was not a direct transfer from the IRA to charity, but rather a transfer from the participant to the charity.

Special election for January 2013 IRA distributions to charity to be treated as made in 2012. Under another special rule, for purposes of both (1) the tax-free qualified charitable distribution rules, and (2) the RMD rules as they apply to IRAs, any qualified charitable distribution made after 12/31/2012 and before 2/1/2013 (i.e., during January 2013), was deemed to have been made on 12/31/2012, if the IRA owner so elected. Thus, at the taxpayer's election, a qualified charitable distribution made in January 2013 was permitted to be treated as made in 2012, and thus permitted to (1) count against the 2012 $100,000 IRA charitable rollover exclusion, and (2) be used to satisfy the taxpayer's RMD for 2012.

For purposes of the special election for January 2013 distributions, the IRA distribution must have been made by the IRA trustee directly to the eligible charity, unlike the exception to the direct transfer rule provided under the special election for December 2012 distributions discussed above. A qualified charitable distribution made in January 2013 that was treated as a 2012 distribution satisfied the IRA owner's undistributed 2012 RMD if the amount of the qualified charitable distribution equaled or exceeded the 2012 RMD. However, no part of such a distribution could be used to satisfy the 2013 RMD, even if the 2012 RMD had already been made.

Planning for 2014 while awaiting congressional action

Once again, taxpayers have been left in the dark for the year 2014 regarding whether the IRA charitable rollover provision will be available; whether it will be retroactive to 1/1/2014; and the extent, if any, of any special relief provisions that will be applied if Congress does ultimately reinstate this provision. Based on what has transpired in the past when the IRA charitable rollover provision has previously expired and was later retroactively reinstated by Congress, taxpayers should proceed with caution for the tax year 2014.

Taxpayers who would otherwise contribute their 2014 RMDs to charity should not take such distributions personally, as the IRA charitable rollover provision applies to only distributions made directly from an IRA to charity. Even though the IRA charitable rollover provision has been consistently reinstated on a retroactive basis, the legislation extending the provision, no matter how late in the year it has come, has never allowed IRA distributions that were personally taken at any time during the year to qualify for IRA charitable rollover treatment if such distributions were then redistributed by the taxpayer to charity.

For instance, as indicated above, under ATRA, which extended the IRA charitable rollover provision retroactive to 1/1/2012 and through to 12/31/2013, but did not become law until 1/2/2013, an IRA distribution that was distributed directly to a taxpayer during December 2012 could qualify for the IRA charitable rollover provision for 2012 if the amount was transferred as a qualified charitable distribution at any time prior to 2/1/2013. Distributions from an IRA prior to December 2012 did not qualify for such rollover treatment.

Thus, taxpayers taking their RMDs personally prior to Congress taking action to retroactively extend the IRA charitable rollover provision (assuming such action is taken in the first instance) for 2014 face a substantial risk of forfeiting the application of such provision with respect to such amounts.

At this point, the most prudent course of action for those who would otherwise consider using the IRA charitable rollover provision if it is ultimately reinstated during 2014 is simply to defer action until the law in this area becomes clear over the remainder of 2014 if and when Congress acts. But, if a taxpayer is intent on having all or a portion of his or her RMD go to charity before the tax issue is clarified because, no matter what, the taxpayer would otherwise contribute cash to charity in 2014 in an amount up to or greater than the RMD, the distribution should be made directly to charity, even though the IRA charitable rollover provision is not in effect at that time. This way, the distribution will fall within the provision should it be reinstated retroactively to 1/1/2014 and, therefore, excluded from gross income (up to $100,000).

Taxpayers should be aware, however, that if, contrary to the precedent established by Congress, the rollover provision is not retroactively reinstated, the distribution from the IRA will be included in gross income and eligible for a charitable income tax deduction, which may result in less favorable tax consequences than under the IRA charitable rollover provision that simply excludes the distribution from gross income. In addition, taxpayers should be aware of the extent, if any, of such less favorable tax consequences before making the distribution so they can make an informed decision.

Where a taxpayer's RMD is less than $100,000, it is not prudent from an income tax standpoint to distribute funds from an IRA to charity in excess of the RMD amount, as doing so would cause such distribution to constitute taxable income if the IRA charitable rollover  is not reinstated for 2014, subjecting the taxpayer to negative tax consequences, which could otherwise be avoided by using assets from nontaxable sources to fund desired charitable giving. Even where the IRA charitable rollover provision is in effect, donors having substantially appreciated assets, such as securities, will generally be better off contributing those assets versus funding a contribution from an IRA. This is the case because the contribution of the appreciated assets avoids the imposition of capital gain tax and typically produces an income tax deduction at fair market value. In these situations, it will likely be preferable for a donor to make taxable IRA withdrawals and take an offsetting charitable income tax deduction attributable to the contribution of the appreciated assets.

Where, however, the donor is already subject to the maximum gross income percentage limitation on charitable giving for a particular year, the donor would likely be better off funding additional contributions under the IRA charitable rollover provision.

Conclusion

Because Congress has allowed the IRA charitable rollover provision to expire in 2014 and has not yet taken any action to reinstate it, donors and charities have been left in the dark as to whether the IRA charitable rollover provision will ultimately be available for 2014, thereby diminishing the value of an otherwise very favorable and popular charitable-giving incentive. Donors seeking to use the IRA charitable rollover provision for 2014 should proceed with caution pending congressional action, with the most prudent approach being deferring any IRA distribution until the law in this area becomes clear over the remainder of 2014.

Donors intent on contributing their RMDs to charity prior to such action should have the RMDs transferred directly to charity so the distributions will fall within the IRA charitable rollover provision should it be reinstated retroactively to 1/1/2014. These donors should be aware, however, that such distributions will not be excluded from gross income if the IRA charitable rollover provision is not retroactively reinstated, potentially resulting in negative tax consequences. In any event, until the rollover provision is clarified, donors should not fund charitable contributions from their IRAs in an amount in excess of their RMDs.

  • 1. The IRA charitable rollover provision was enacted under the Pension Protection Act of 2006 (PPA), and is contained in Section 408(d)(8) of the Internal Revenue Code of 1986, as amended. For a discussion of the potential negative tax drawbacks of funding lifetime charitable giving with IRA withdrawals, see Fox, “Charitable Incentives and Limitations of the Pension Protection Act,” 33 ETPL 3 (November 2006).
  • 2. Congress passed ATRA on 1/1/2013, the day before the President signed it into law.
  • 3. On 5/29/2014, the House Ways and Means Committee passed five charitable bills, including one making the IRA charitable rollover provision permanent (H.R. 4619). Subsequently, on 7/17/2014, the House of Representatives passed the “America Gives More Act of 2014” (H.R. 4719), which includes a provision making the IRA charitable rollover permanent, retroactive to 1/1/2014. The Senate continues to follow a more traditional approach with the EXPIRE (Expiring Provisions Improvement Reform and Efficiency) Act of 2014 (S. 2260), which would extend the IRA charitable rollover provision for the tax years 2014 and 2015, retroactive to 1/1/2014. In past years, the mid-term elections caused virtually all controversial tax issues, including charitable tax extenders, to be deferred until a November lame-duck session. Ranking House Ways and Means Committee Member Sander Levin has suggested that a conference of the House and Senate will be held in November 2014 to resolve this issue and that the most likely result will be a two-year extension as has been done in the past.
  • 4. Section 408(d)(8)(A).
  • 5. Notice 2007-7, 2007-1 CB 395, Q&A-34.
  • 6. Id., Q&A-42.
  • 7. Id., Q&A-43.
  • 8. Id.
  • 9. See, e.g., Strom, “Tax Break to Encourage Giving is Creating Confusion Instead,” New York Times, 12/3/2006. The article states that there was a great deal of misinformation and a general lack of knowledge about the IRA charitable rollover provision, including some of the banks and brokerage houses that manage IRAs resisting direct transfers of donated funds to charity, stating that, “[t]he reasons for the custodians' reluctance include ignorance of the measure ... and lack of guidance from the Internal Revenue Service.” Following the New York Times article, and a 12/20/2006 letter from Rep. Roy Blunt, then the House Minority Whip, to then Secretary of Treasury Henry Paulson requesting additional guidance on the IRA charitable rollover provision, the IRS issued Notice 2007-7.
  • 10. Note 5, supra.
  • 11. Section 408(d)(8)(B).
  • 12. Notice 2007-7, supra note 5, Q&A-36.
  • 13. Id
  • 14. Section 408(d)(8)(B)(i).
  • 15. Id. Should they seek to be eligible recipients of IRA charitable rollovers , organizations that are currently treated as supporting organizations under Section 509(a)(3) that may qualify for public charity status under another provision of the Code should seek reclassification of their public charity status. This may be the case, for example, for a hospital foundation that initially sought public charity status as a supporting organization which, because of its public support, could otherwise qualify as a public charity under Section 509(a)(1) as an organization described in Section 170(b)(1)(A)(vi).
  • 16. Section 408(d)(8)(B)(ii).
  • 17. Notice 2007-7, supra note 5, Q&A-37.
  • 18. Section 408(d)(8)(B)(i)
  • 19. Notice 2007, supra note 5, Q&A-41.
  • 20. Section 408(d)(8)(C); Notice 2007, supra note 5, Q&A-39.
  • 21. Section 408(d)(8)(B)
  • 22. Section 408(d)(8)(D)
  • 23. Because it became effective for tax years beginning after 12/31/2005, the charitable rollover provision was enacted retroactively when it was first enacted, given that the PPA was not enacted until 8/17/2006. Thus, if a pre-8/17/2006 distribution from an IRA to charity satisfied all the requirements under Section 408(d)(8), the amount distributed was still excludable as a qualified charitable distribution.

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