IRS Explains How To Report Charitable IRA Exclusion" on 2006 Income Tax Returns"

IRS Explains How To Report Charitable IRA Exclusion" on 2006 Income Tax Returns"

Article posted in Compliance on 4 December 2006| 3 comments
audience: Leimberg Information Services, National Publication | last updated: 18 May 2011
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Summary

Following passage of the PPA 2006 and the first "Charitable IRA Rollover," the two most significant questions on advisors' minds have been how taxpayers will exclude qualified charitable distributions on their income tax returns and whether or not IRA custodians will be responsible for determining if a distribution is indeed qualified. In this article, UMKC law professor Christopher R. Hoyt shares the answers.

by Christopher R. Hoyt

Many of us have asked how the charitable IRA exclusion (a/k/a "Charitable IRA Rollover") will be reported on 2006 income tax returns. As you know, the Pension Protection Act of 2006 provides that in 2006 and 2007, a person over the age of 70 1/2 can donate up to $100,000 from an IRA to most types of public charities and to private operating foundations and can exclude the gift from taxable income. There is no charitable income tax deduction for the gift. The tax benefit -- particularly for non-itemizers - is the ability to exclude the distribution from gross income.

Some of the 2006 tax forms have been released and have been sent to the printers. On page 25 (Exception # 3) of the Form 1040 instructions http://www.irs.gov/pub/irs-pdf/i1040.pdf we see the approach that the IRS will use. The IRA custodian will report all distributions from the IRA to both the IRA owner and to the IRS. Then, the IRA owner will report all of the distributions on line 15A of Form 1040 but only the taxable distributions on line 15B. Thus, the charitable IRA exclusion will be reported similarly to a traditional rollover, where a person may have received a taxable distribution from a retirement account but is able to avoid taxation by rolling over the amount within 60 days to an IRA or to some other type of eligible retirement account. These charitable IRA gifts will not be disclosed in any way on Schedule A, where itemized deductions -- including traditional charitable gifts -- are reported.

EXAMPLE: Mr. Smith, age 76, is required to withdraw $4,000 from his IRA in 2006 to avoid the 50% penalty for failure to take minimum required distributions after age 70 1/2. He had the IRA trustee send a $1,000 check to his favorite charity. Mr. Smith received an acknowledgement from the charity that stated that he received no personal benefit and that the entire gift qualified for a charitable income tax deduction under the normal rules (such an acknowledgement is necessary for the charitable IRA exclusion). Mr. Smith personally withdrew an additional $3,000 from the IRA. The IRA custodian will issue Form 1099-R and will report $4,000 of total distributions. Mr. Smith will report the $4,000 of total distributions on Line 15A of Form 1040 but will report only $3,000 of taxable distributions on Line 15B. http://www.irs.gov/pub/irs-pdf/f1040.pdf The $1,000 gift will not be disclosed or reported on Schedule A where Mr. Smith deducts the other charitable gifts that he made.

Technically, the statute doesn't use the term "IRA owner" but instead uses the phrase "the individual for whose benefit the [individual retirement] plan is maintained." This suggests that the charitable IRA exclusion should be available not just to the person who established the IRA but also for a person over age 70 1/2 who is a beneficiary of an inherited IRA. This is just one of several unanswered questions for which we need guidance from the IRS. Other recurring questions include whether it is permissible to satisfy a pledge with such an IRA distribution and the tax consequences of checks that are issued from IRAs in one year but which are not received by the charities until the next year. The IRS instructions refer readers to IRS Publication 590 for more details, but the 2006 version of that publication hasn't yet been released.

Overall, the Service's approach is welcome news. IRA custodians are freed from a duty to investigate whether a check qualifies for a charitable exclusion or not. They just report all distributions as presumably taxable distributions. The burden falls on the taxpayer, who is in the best position to know the full nature of the charitable gift and whether it qualifies for the charitable IRA exclusion or not.

Finally, you will note that the new forms do not provide for any of the laws that expired in 2005. These are the so called "extenders" that Senator Grassley still may try to enact retroactive to the beginning of the year, but the outlook is uncertain.

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Comments

IRS Guidance on Charitable IRA Exclusion

Outside of the the aforementioned documentation by the charity of "no personal benefits and charitable income tax deduction under the normal rules", are there any other PPA compliance statements that the charity should include in the annual tax receipt to the donor? Thanks for the help! Meril Amdursky

IRS "Charitable Rollover" Compliance Statements

Similar to the previous comment, is there any required or suggested language that charities should include in their gift acknowledgements to donors beyond the normal "no benefits or services have been received" text?

Suggested Acknowledgement Language

Please refer to the sample written acknowledgement at the end of our August 14 article on the IRA Rollover at http://www.pgdc.com/home/item/?itemID=368499. In addition to the no goods or services language, we added the following: "We are writing to acknowledge that we received your gift directly from your plan trustee/administrator and that it is your intention for all or a portion of your gift to qualify as a qualified charitable distribution from your IRA under section 408(d)(8) of the Internal Revenue Code. In that connection, we warrant to you that our organization is qualified under section 170(b)(1)(A) of the Internal Revenue Code and that your gift was not transferred to either a donor advised fund or a supporting organization as described in section 509(a)(3)." Should the gift ever be examined by the Service, we believe this language would cover the qualification requirements. Hope this helps.

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