Following the enactment of the Tax Cuts and Jobs Act (TCJA), nonprofits have expressed concern about decreased contribution revenue because of changes in the new tax law, such as an increased standard deduction. There is still opportunity to attract donors to support your mission. Charitable giving can provide not only tax deductions, but also the satisfaction of doing good. On top of that, it’s one of the most flexible tax planning tools because donors can control the timing of their deductions to best meet their needs.
Background: Prior to 2013, taxpayers could not directly transfer funds tax-free from an IRA to a charitable organization. Instead, individuals were required to pay tax on the distribution, regardless of their charitable intentions. In effect, the tax law worked against retirees who wanted to use IRA funds for charitable donations but no longer itemized their deductions.
One opportunity available to nonprofits is the qualified charitable distribution. American taxpayers age 70½ or older who have traditional Individual Retirement Accounts (“IRA”) must begin withdrawing money from their IRA. Each year, the required minimum distribution (“RMD”) must be calculated and distributed to the owner. For these individuals, there is a way to take advantage of the standard deduction and get a tax benefit from charitable donations.
Taxpayers who have an annual RMD can transfer up to $100,000 of their IRA directly to a qualified charitable organization while paying zero tax on the distribution. Such a “charitable rollover” also counts as a required minimum distribution (RMD) for tax purposes and because the money goes directly to a charitable organization, it is excluded from the individual’s taxable income. The TCJA has made this permanent.
Your donors will need to consider their individual tax situations and the type of IRA they will use for the contribution.
A qualified distribution is defined as one from either a traditional or Roth IRA that would otherwise be taxable. The distribution must be made directly from the IRA trustee to the charity.
Furthermore, the contribution must otherwise qualify as a charitable donation. If the deductible amount decreases because of a benefit received in return—a dinner at a fundraising event, for example—or the deduction would not be allowed due to inadequate substantiation, the exclusion is not available for any part of the IRA distribution.
Under a special rule for charitable donations, the IRS treats distributions from an IRA funded at least partially with nondeductible contributions as coming first from taxable funds and then from nontaxable funds. All of the individual’s IRAs are grouped together for this calculation.
Note that the same technique may be used for Roth IRAs. Roth IRA distributions to individuals older than age 59½ are often tax-free. But a portion of a distribution may be taxable for a Roth in existence for less than five years. If individuals have both a traditional IRA and a Roth IRA, it generally makes sense to use the traditional IRA first for charitable distributions
Reminder: The charitable rollover technique is not for everyone but this is an option for nonprofit charitable organizations to consider as they talk to donors about giving options. To discuss how this may work for your nonprofit, please contact Sabre Linahan or another Smith & Howard tax professional by submitting the contact form listed on this page or calling 404-874-6244.