ira charitable rollover

Quick and Simple for the Not so Quick and Not so Simple!

My last post on IRA giving without the IRA law reenacted created a stir among my colleagues – some not positive so here is the quick and simple explanation for something that is completely not quick and not simple: calculating real tax costs for jumping the gun on IRA giving (ie.. giving directly from your IRA on the hope the law will be passed retroactively)!

It is almost impossible to calculate the real tax costs BUT I am going to give you a simple explanation that I confirmed with Laura Peebles and please read to the end to get her very good points!

#1 – IRA withdrawal then gift (without IRA rollover in effect) only impacts a donor in regards to the Phase Out provision from the American Taxpayer Relief Act of 2012 (funny how they called it the “taxpayer relief act”…).  IF THE PHASE OUT DOESN’T APPLY TO YOUR DONOR, THERE IS NO IMPACT FOR AN IRA GIFT/DEDUCTION. SEE NEXT POINT.

#2 – What is the Phase Out provision?  When your Adjusted Gross Income (AGI) exceeds the Thresholds ($250,000 for single filers, $275,000 for individuals filing as heads of households, $300,000 for married couples filing jointly and $150,000 for married individuals filing separately) THEN you lose 3% of the your itemized deductions to the extent that your income exceeds your threshold.

Take a look at this chart and then read more:

Assumption: Single tax filer, Phase out threshold $250,000
NO IRA Gift IRA Gift of $100,000 and law doesn’t pass
Gross income (includes IRA withdrawals + usual stuff) $200,000 $300,000
Minus adjustments (IRA contributions, some tuition or medical, educator or some business expenses) (not relevant) (not relevant)
Adjusted gross Income $200,000 $300,000
Minus various deductions (standard deduction or itemized including charitable giving, real estate tax, mortgage interest) $25,000 $123,500 [$125,000- (3%*$50,000)]
Taxable income $175,000 176,500
What you owe (Taxable income times your tax bracket) – 28% bracket $49,000 $49,420
Cost of extra IRA withdrawal n/a $420

This is actually not an oversimplification! (I kept the numbers simple but the impact is real)  Under my simple scenario, single donor causes himself an additional $420 in tax cost by making a $100,000 IRA rollover gift (assuming law is not reenacted).  What happened?  He started out with an AGI of $200,000, under the threshold for a single individual.  By making the IRA gift (that is treated a withdrawal when the law isn’t passed), he knocked his AGI up to $300,000, exceeding the threshold by $50,000.  Law says multiply $50,000 by 3% (which is $1,500) and then reduce the donor’s itemized deductions by that amount.  In other words, multiply the donor’s tax bracket against the amount reduced by the phase out and there you have it: a real cost of $420 for this scenario for this imaginary donor to make a $100,000 direct IRA gift assuming the law is NOT reenacted (if reenacted, no cost!).

Most donors are nowhere near the threshold amounts and therefore this discussion should give you ideas of who to promote this giving option with.  Of course, any donors whose AGIs are near the threshold, there could be a cost to the gift should the law not be passed if your IRA gift causes your AGI to exceed the threshold.  Could even be a few thousand dollars. Of course, if we are talking about a gift of a few thousand from an IRA, the cost – if any – is likely less than $100!!!

Bottom line quote from Laura Peebles:

“Bottom line: run the numbers, but don’t let the hiatus in the law be an impediment to doing what otherwise might be good tax planning–assuming that the donor is willing to live with the alternative results.”

Also, if the donor was going to take his/her required minimum distribution (RMD) anyway, why not try this! The donor was going to have to add the RMD to his AGI in any case!

Of course, every potential donor needs to be encouraged to run this by their accountant but if the donor is looking for ways to give – and IRA funds make sense – why not consider it!

No charitable IRA rollover, no problem.

I love that title.  Not mine though.  It is the title to an article in Investment News (click to see it) that picks up on a recent theme of mine of encouraging donors to go ahead and use IRA funds (under various caveats) for charitable giving (with or without the IRA giving provision!).  The author of the article is Andrew Hibel, president and founder of The Advise Us Fund, a donor-focused donor-advised fund (cool website that has me a bit jealous!).

He has an interesting suggestion for donors.  He suggests that a donor withdraw from his IRA whatever amount he plans on giving.  Then, donate long-term appreciated securities of an equal value to a donor advised fund to offset the income incurred by the IRA withdrawal.  A pretty nifty idea.  Donor also avoids the capital gain on the securities and now has DAF flexibility to grant fund as he wishes.

He throws in one more idea.  If donor likes the stock he just donated, why not buy it back with the cash he just received from his IRA withdrawal?  That puts donor in a better tax position with that stock.  I am not sure we need this last suggestion – I think the idea up until that point works fine but I guess it might work for some that last step.

Of course, all of this talk of multi-step transactions may not be very practical.  I mentioned in a previous post that I was recently involved in a situation where a donor planned on making a significant IRA transfer gift (this year).  He would instruct the IRA administrator to send the funds to the charity.  If the IRA law passes, it qualifies as an IRA rollover gift.  If not, the gift counts as a taxable withdrawal but there would also be an offsetting income tax deduction.  The real cost to the donor of the law not passing would have been $0 (i.e. no negatives either way). I thought we would be seeing a check any day.

Nope.  Donor’s accountant told the donor to wait to see what happens with the law, in any case.  It sounded simple enough to me but it may have been a bit too complex. In fact, the more complex a gift situation, the less likely it will ever happen.  At least that is what I have seen throughout my career.

IRA Rollover Update – Almost there?

We’re getting closer to having an IRA giving option again.

The House Ways and Means Committee actually voted yesterday to permanently extend the IRA Rollover! (click here to read more about this as well as some other cool potential legislation they passed – no reason to comment yet on the rest as the likelihood of actual enactment seems too slim)

Don’t get too excited though.  The Senate is doing something completely different with tax extenders this year, which makes us wonder how and when it will all turn out (check out this article for a more indepth discussion).

We’ll see by the end of the year or even next year what happens on this.  Stay tuned.