If you had blinked, you would have missed it – nontaxable IRA transfers to charity were approved and then expired within a 2 week period this last December. Since it seems that every year Congress re-authorizes expired tax breaks, my guess is that we will see a repeat in 2015 and taxpayers will again have a limited window to transfer IRA assets to charity. If you are charitably inclined and in a higher tax bracket, you should take this strategy into account for your 2015 charitable planning.
What is it? An IRA to charity transfer is a direct distribution of up to $100,000 from an IRA account to an eligible charity. The only catch is that the IRA account holder must be 70 1/2 or older. The provision authorizing this procedure expired on December 31, 2013, but in December, 2014, the expiration date was extended to December 31, 2014. This means that taxpayers that made an IRA to charity transfer anytime in 2014, even if it was not good law at the time, are entitled to reap the tax benefits of the transfer.
What are the tax benefits?
- The transfer qualifies as the required minimum distribution, meaning any amount transferred reduces the amount that would otherwise be required to be withdrawn and recognized as income.
- The amount transferred does not count as income, but there is no deduction for a charitable contribution.
- Lower income is almost always a good thing from a tax perspective – lower marginal tax rates, avoidance of the Medicare surtax on investment income, lower taxation of social security benefits, and avoidance of income-based itemized deduction and exemption phaseouts.
So what should I do? You have 2 options – you can assume that the provision will be extended again and make the transfer now, or you can wait until the end of the year to see what happens. If the provision is not extended and you make the transfer now, you will be in no worse position so long as you don’t transfer more than your required minimum distribution. If you wait and see and the provision is not extended, then you may have to squeeze all your planned charitable contributions into the end of the year.