Have you wanted to make a gift to your alma mater or church but you do not have cash on hand to make the gift? There may be a new way to accomplish your goals. Much of the average person’s wealth is tied up in IRAs and Qualified Plans, like 401(k)s. For years, there have been proposals in Congress to allow you to give part of your retirement plan to charity directly. Now you can give directly from your IRA (but not 401(k)), with restrictions.
Prior to the new law, you would have had to withdraw money from the plan, report the income, contribute the money to charity, and take a charitable tax deduction, which could be limited. You might wonder “what’s the difference?” Itemized deductions, such as charitable contributions and mortgage interest, must exceed the pre-set standard deduction amount before they are useful. In other words, even if you have some itemized deductions, you would take the standard deduction unless the itemized deductions were greater. Also, charitable contributions are only deductible up to 50% or less of your income, depending on the type of charity and the type of property. However, with this special direct contribution to charity, you are not subject to those limitations.
Let’s take a look at an example: John, who is 71 and retired, has $500,000 in his IRA. He has an income of $40,000. His alma mater has another donor who is matching gifts made this year. John would like to give $100,000 to the school this year so it will trigger the match from the other donor. Previously, John would have had to withdraw $100,000, increasing his taxable income to $140,000. Then, he would have been restricted to a charitable deduction of 50% of that, or $70,000. He could have carried over the balance to future years. However, in the year of the contribution, he would have paid about $9,000 more in tax as a result. He would still have had a carryover of $30,000 of deductions, but because he would be in a much lower tax bracket, that would only save him around $3,000 in tax—a net tax cost of $6,000 just for giving to charity!
Under the new law, John could give part of his IRA directly to the institution. If he did, his income remains the same and the entire $100,000 that was distributed from the IRA to the charity is excluded from his income, so he is no longer penalized for giving to charity.
Of course, there are restrictions.
- The exclusion applies only to those who have reached age 70 ½ by the date of the contribution to the charity.
- The new law applies only to IRAs and Roth IRAs, but not to 401(k), 403(b), and other retirement plans.
- The exclusion is limited to $100,000 per taxpayer per year. A married couple each with IRAs with sufficient assets could exclude up to $200,000 each year.
- The contribution must be made directly from the IRA custodian to a public charity.
- You cannot receive anything in return for the contribution. So, you cannot do this in return for a stream of income or other benefits.
Gifting assets can be a rewarding way to help assist your favorite charity. A qualified estate planning attorney can help you decide the best way to achieve your goals and obtain the best result for you and the charity of your choice.
Mr. Ronald “Chip” Morrison, Jr. is a board-certified estate planning attorney with experience in both simple and complex estate matters and has been a Member of the American Academy of Estate Planning Attorneys since 2017. He can prepare an estate plan for you that achieves your goals of passing your assets to whom you wish. To learn more about how you can achieve your estate planning goals, please call our office in Metairie, Louisiana at (504) 831-2348 or contact us through our website.
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