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Tax Benefits of Using Your IRA Distributions to Donate to Charities

Donating to charity your IRA distributions can be an excellent way to both support causes that are meaningful to you and reduce your taxes. Fortunately, a provision of the Internal Revenue Code, which gives donor’s a significant tax benefit, was made permanent at the end of 2015 so individuals can now take advantage of the rules as an integral part of their tax and estate planning.

Since 2006, the Internal Revenue Code has intermittently allowed “qualifying charitable distributions” from both traditional IRA and Roth IRA accounts. With passage of the Protecting Americans from Tax Hikes Act of 2015 (“PATH”), Internal Revenue Code § 408(d)(8) now permanently permits qualifying charitable distributions made from an IRA to be excluded from the donor’s gross income. The law is effective for distributions made in taxable years beginning after December 31, 2014 provided that:

  • The contribution must be made to a 501(c)(3) charity
  • No more than $100,000.00 per year can be excluded from gross income
  • The contribution must be made directly by the IRA Trustee to the charitable organization
  • The donor must have already reached the age of 70 ½.

By making a donation directly from the IRA rather than taking the IRA distribution and then making the donation, donors can avoid any limitation being imposed on how much of the contribution can be deducted. Taxpayers with higher adjusted gross incomes often cannot take advantage of all of their charitable contributions because of limits on the amount they can deduct based upon their total income. Under Internal Revenue Code § 170(b) (1) (A), the amount that can be deducted by an individual donor is limited to no more than fifty percent (50%) of the taxpayer’s contribution base (i.e. adjusted gross income) for the tax year in which the donation is made. However, by utilizing the provisions of the 2015 law, qualifying charitable distributions under § 408 have no limitation on deductions since the donor never receives the funds and does not have to report any income. A donation under § 408 completely avoids that issue because the amount donated (up to $100,000.00 annually) is excluded from gross income and therefore is effectively 100% deductible.

The donor can either itemize or take the standard deduction (assuming it is more beneficial to them than itemizing) and also make the charitable contribution from the IRA and have no tax consequences for making the contribution.

The charitable contribution would also count against the amount of the required annual minimum distribution which the owner of an IRA must take upon reaching a certain age. Thus, the required minimum distribution rules can be satisfied without increasing your income and, in turn, your taxes.

If your spouse has an IRA and otherwise qualifies (i.e. at least 70 ½ years of age) he/she can also roll over and donate up to $100,000.00. As this is an annual contribution limit, the donor (and the spouse) could (each) make a contribution of up to $100,000.00 each year.

Finally, assuming the charitable organization is willing, it can utilize the $100,000.00 it receives to purchase a single premium life insurance policy on the donor’s life, naming the charitable organization as the beneficiary. Although the charity would have to wait until the donor’s death to receive funds, it would increase the amount actually received by the organization by a substantial amount because it can purchase more than $100,000 of life insurance when paying a single premium of $100,000. For example, a life insurance policy on the life of a 71 year old male with standard risk, non-tobacco user, with a $100,000 single premium can generate a benefit in excess of $150,000 and a similar policy on the life of a similarly situated female donor can generate an even greater benefit.

Individuals should speak to a qualified attorney about how to maximize their charitable donations for tax and estate planning purposes.

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This post does not constitute legal advice or establish an attorney-client relationship.

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