Charitable IRA makes a last-minute comeback for 2014

Gotta love the way we make tax policy these days.

Congress finally okayed charitable IRA transfers for 2014 (!) this week. This provision – which bounces in and out of existence like a yo-yo – allows IRA account owners who need to take Required Minimum Distributions (RMDs) to make direct contributions to charitable organizations, and count the donated amounts against their RMDs.

The charitable IRA provision is of interest only to wealthy households with retirement assets that they don’t need to meet their own spending purposes. And if you’ve already taken your RMD for this year (as most probably have), it’s worth knowing that you can’t reverse an already-taken RMD to execute this move. Also note that you don’t get a tax deduction for a charitable gift donated direct from an IRA.

The move does reduce adjusted gross income (AGI), and that can help elsewhere. It can help reduce taxation of Social Security benefits, or avoid high-income surcharges on Medicare premiums. It could also help you avoid the 3.8 percent surtax on net investment income, which is paid by joint filers who report AGI over $250,000 ($200,000 for single filers).

There’s still time to get this done for 2014. Over at Nerd’s Eye View, Michael Kitces has the rundown on timing and retroactivity:

With two weeks remaining in the year, there is still time for those who have not yet satisfied their 2014 RMD to make a QCD to a charity, resolving both their RMD obligation and their charitable intent. Even if the tax extender law has not yet been signed, as long as the IRA distribution is made directly to the charitable in a manner that is consistent with the law, the retroactive reinstatement of the tax extenders will make it a QCD. Similarly, it is notable that if someone already had made a direct distribution from an IRA to a charity – in anticipation of the rule being extended – it will now qualify, retroactively, as a QCD. However, if the individual’s RMD was already withdrawn for the year, there is no way to “undo” the RMD and now make a QCD instead; at best, the individual can simply donate to the charity (by cash or check), and claim a normal itemized deduction for charitable contributions that will mostly (though probably not fully) offset the taxable income from the prior IRA distribution.

The charitable IRA distribution has been in and out several times in Washington, but volatility hasn’t affected usage all that much, according to Greg Rosica, a tax partner at EY and a contributor to the 2015 EY tax guide. “In previous years there was more clarity and it was available earlier, but it does get a decent amount of usage from the group that it targets – people who already are past the age where they need to take RMDS, and have balances large enough to do this.”

The extension affects only the 2014 tax year – the uncertainty returns in January for 2015 tax returns. Despite that, Rosica notes that it will be possible to make charitable IRA distributions for 2015. “The only question will be how it will be taxed. If the charitable distribution provision isn’t renewed, you would owe tax on that amount as ordinary income and the amount would count against your AGI.”

Comments

  1. I made my RMD on December 5th. The required minimum distribution was $10,000. I would like to give $3,000 to a designated charity. Why can’t I take advantage of the 60 day period I have to reverse an IRA distribution as follows. Before year end, I would return $3,000 to the IRA account it was withdrawn from, direct the fiduciary to make a $3,000 QCD and satisfy my RMD, with the $7,000 I kept and the $3,000 I reversed then had the fiduciary send to the charity.

  2. Mark Miller says:

    You should consult an accountant on this, but I refer you to Kitces’ analysis of this (see: https://www.kitces.com/blog/tax-extenders-reinstated-temporarily-but-able-act-of-2014-will-permanently-change-529-plan-landscape-for-special-needs-beneficiaries/#more-5506) –

    “However, if the individual’s RMD was already withdrawn for the year, there is no way to “undo” the RMD and now make a QCD instead; at best, the individual can simply donate to the charity (by cash or check), and claim a normal itemized deduction for charitable contributions that will mostly (though probably not fully) offset the taxable income from the prior IRA distribution.”

  3. Thanks. I posed the same question at the Kitces blog and am waiting a response.

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