Charitable IRA rollovers and what you’re missing, thanks to Congress

Every two years since 2006, Congress has renewed the charitable IRA rollover, but financial advisers and donors are never sure if it will happen.
It passed with two weeks left in 2014 but in a change from past practice, was renewed only for tax year 2014. No word on its status for tax year 2015.
So, as in past years, some individuals will “risk it” and use the charitable individual retirement account rollover now, hoping that the law will eventually cover them, and they will avoid adverse tax consequences. Many — perhaps most — others will wait for legislative renewal before they act.

TIMING IS CRUCIAL

The charitable IRA rollover, also known as a qualified charitable donation or distribution, accounted for $140 million in donations in its first two years and has resulted in hundreds of millions of dollars in donations just to colleges and universities since enacted into law in 2006. It permits individuals to gift up to $100,000 directly to a public charity. The donor can deduct the full amount of the donation from gross income for tax purposes.
(More: House set to vote on making tax breaks for IRA charitable donations permanent)
Despite its popularity, the provision likely would be even more popular if the legislation permitting its favorable tax treatment wasn’t so uncertain each time it came up for renewal. Recent charitable IRA rollover history is all about “last minute” legislative action that often required quick action by donors to qualify.
In tax year 2011 the law expired and was revived in tax year 2012 as part of the Jan. 1, 2013 “fiscal cliff” American Taxpayer Relief Act of 2012. If you sense a problem for those seeking to use the charitable IRA rollover in tax year 2012, you’re right. The law allowed those who took a qualified IRA distribution in December 2012 to donate it to charity by the end of January 2013 for favorable tax treatment in 2012. It also allowed January 2013 qualified IRA distributions to count for tax year 2012.
If your clients didn’t or couldn’t act in January 2013, to benefit in the 2012 tax year, then they lost out.
In 2014, clients had only two weeks to act after the law was passed to guarantee favorable tax treatment. Barring more timely legislation this year, advisers with clients age 70-1/2 years old or older that would benefit from a charitable IRA rollover should speak with them about their wishes well ahead of year-end in preparation.

BENEFITS
The charitable IRA rollover offers an easy, tax advantaged way to donate to charity. Benefits include:

• Tax treatment of required IRA distributions. The charitable IRA rollover is designed for individuals age 70-1/2 or older to give directly to qualified charities and avoid tax obligation they might incur from required or elective IRA distributions.

• Tax treatment for more generous donors. Related to the tax deductibility described above, the amount donated is not included in the adjusted gross income (AGI) of the donor — and thus not subject to percentage limits for charitable deductions. More generous donors who might not receive tax advantages from additional donations may benefit from a reduced AGI here.

• Tax treatment of appreciated assets. Also related to the tax deductibility described above, appreciated assets in IRA accounts may be sold, and a distribution from the IRA taken, with significant tax advantages.

ROLLOVER LIMITS

While popular, the charitable IRA rollover provision has restrictions that limit its appeal.

• Age: Individuals qualify for a charitable IRA rollover at age 70-1/2 or older.

• Donation amount: The provision limits donations to $100,000 annually per person.

• Donation beneficiary: Donations must go directly from the IRA custodian to a public charity — the donor may not take possession of the funds. Donations cannot go to a donor-advised fund, supporting organization or private foundation (with the exception of a private non-operating foundation meeting conduit rules).

These restrictions limit the appeal of charitable IRA rollovers. But having the law in limbo every one to two years is perhaps its greatest limitation.
“Each year I have clients that could benefit from a charitable IRA rollover,” reports Timothy B. Kneen, chief investment officer of IFM Capital Advisors in Denver. “But now I need to tell them they have to wait and hope.”

AN ALTERNATIVE
What if you could do something similar to a charitable IRA rollover with many more of your clients qualifying, fewer downsides and more advantages? The great news is you can — and you don’t need to wait for the law to change. It’s called the charitable alt-IRA and we describe it in Part 2 of this series.

Andrew Hibel is president and founder of The Advise Us Fund, a donor-focused donor-advised fund.