The 2014 Charitable IRA Rollover: Who Might Benefit, and When Must Action Be Taken?
As anticipated in our last post, President Obama signed into law the Tax Increase Prevention Act of 2014 (Pub. L. No. 113-___ (2014)) on December 19, 2014. As a result, taxpayers age 70 1/2 or older may avoid reporting as income up to $100,000 of an otherwise Required Minimum Distribution (RMD) by transferring the funds directly from their IRAs to qualified charities. These so-called charitable IRA rollovers must occur before the ball drops in Times Square, but we strongly advise you not to wait until the last day. The paperwork and processing will take time, so immediate attention is needed.
On the surface, you may think it is a "wash" if a taxpayer includes an RMD in income, and then deducts it after contributing the same amount to charity. But there are many instances in which this is not so. For example, some taxpayers do not itemize; some are subject to limitations on itemized deductions because they have high income; and some find that increased income causes other adverse tax consequences that cannot be wiped out by a charitable contribution (such as a higher percentage of social security benefits becoming taxable, and a higher threshold for deduction of medical expenses).
Who should consider a charitable IRA rollover? Taxpayers who are charitably inclined, who have not yet taken the full 2014 RMD from their IRA, and who wish to avoid income tax on part or all of their 2014 RMD. The charitable IRA rollover may also help taxpayers remain under the 3.8 percent net investment income tax threshold if their adjusted gross income is approaching the limit ($250,000 for married filers or $200,000 for single filers). In addition, taxpayers who either do not itemize their income tax deductions, or who have already reached the limit of their charitable contribution deduction for 2014, may benefit from the charitable IRA rollover.
Beyond income tax considerations, taxpayers may use the charitable IRA rollover to accomplish estate planning objectives. In general, IRAs are inherently "thorny" assets in an estate. First, they are included as part of the taxable estate when calculating estate -- and, in some cases, generation-skipping transfer – taxes; and second, unlike most other inherited assets, the beneficiaries must also typically pay income taxes when they receive inherited IRA funds (although income taxes can be deferred with proper planning and beneficiary designations). In some situations, the combined transfer/inheritance and income tax burden can consume upwards of 70 to 80 percent of an IRA. In light of these factors, IRAs become an attractive choice for philanthropic taxpayers to contribute to charity. For these reasons, even a taxpayer who has already withdrawn his or her full RMD for 2014 may find it advantageous to use the rollover provision.
There is no way to predict whether the IRA "rollover" will be extended again. A recent effort to make this provision permanent ended in failure, because of the administration’s view that it results in an increased deficit. And, as of now, there is no indication that IRS will allow taxpayers the leeway to make the distribution early in 2015 and "elect" to treat it as made in 2014 (as was done in past years). So you should proceed as if December 31, 2014 is the absolute deadline.
Again, please contact our Private Wealth Services Group if you have questions or would like our assistance.