Lawmakers are expected to pass the measure, which can help
lower the tax bill for older owners of individual retirement accounts, Friday
or next week. It is part of legislation that also makes permanent or
extends a host of many benefits affecting individuals, including an expanded
child tax credit, tax relief for mortgage-debt forgiveness, and the
educator-expense deduction.
The provision for IRA charitable transfers has been highly
popular since it was first passed in 2006. But its status has been a source of
frustration to many, because lawmakers have nearly allowed it to expire five
times, leaving donors in the dark for much of the year as to whether it would
be extended. The latest proposal would be retroactive to the beginning of 2015.
The provision allows IRA owners aged 70 1/2 and older to
donate up to $100,000 of account assets per year directly to one or more
qualified charities such as schools, churches, or health-care groups. The
donations count as part of the IRA owner’s required annual withdrawal—so if the
owner’s minimum withdrawal is $25,000 in 2015 and she makes $10,000 of
qualified donations with IRA assets, she only has to withdraw $15,000 for 2015.
For taxpayers who plan to give money to charity, this
technique offers several benefits. While there is no tax deduction for the
donated assets, they don’t count as income either—unlike most withdrawals from
traditional IRAs. The lower income can help a person avoid taxes on Social
Security benefits or higher Medicare premiums.
Reporting lower income may also help IRA donors remain in
lower tax brackets or avoid backdoor tax increases that apply as income
rises—such as the 3.8% net investment income surtax. Its threshold is $250,000
of adjusted gross income for joint filers and $200,000 for single filers. In
addition, some donors can’t use charitable deductions because they no longer
list write-offs on Schedule A. Instead they take the standard deduction, which
is $6,300 for singles and double that for married couples filing jointly in
2015.
As IRA donors are facing a year-end deadline for 2015,
here’s what many need to know.
—The assets must be transferred directly from the IRA
custodian, such as a bank or brokerage, to the charity.
—To qualify for the break, the donation must be to a charity
and not to a donor-advised fund, a grant-making foundation, or a charitable
gift annuity.
—There can be no benefit back to the taxpayer from the
charity, even a dinner or a favor. “Don’t let a $25 tote bag cost you thousands
of dollars in tax benefits,” says Mr. Slott.
—The IRA donation can fulfill an existing pledge to the
charity.
—The $100,000 limit is per person, so each partner in a
married couple can donate up to that amount if each has an IRA.
—The taxpayer must have proper proof of the IRA transfer in
hand before filing his tax return. For more information, see IRS Publication
526.
—IRA donors can’t return required annual payouts to their
accounts. For example, if an IRA owner has a $15,000 required withdrawal for
2015 and has already taken out that amount because he was worried Congress
wouldn’t renew the provision, he can’t return $2,000 to the account in order to
make a $2,000 IRA transfer to charity this year.
However, this IRA owner could still transfer $2,000 of
account assets to a charity and have it count as a qualified transfer, bringing
his total 2015 withdrawal to $17,000.
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