A Charitable IRA Distribution Provides a Unique Opportunity for Some
The opportunity to make what has become known as a charitable IRA distribution (we'll call it a CIRAD for short) has been around since 2006. It has been somewhat fraught with uncertainty, as it was until recently only a temporary provision that was alternatively in place, then expired, then extended off and on by Congress several times, even being revived retroactively to a previous year.
Finally, however, in 2015 the provision was made permanent. It is a powerful tool for philanthropy for several reasons. But first, just what is it?
A CIRAD is a distribution not to exceed $100,000 a year from an IRA (including a Roth IRA) directly from the IRA trustee to a qualified charitable organization (other than a private foundation or donor advised fund). The IRA owner can in no way touch or have ownership of the distribution at any time for it to qualify. Further, the IRA owner must be at least age 70 ½.
If these requirements are met, the CIRAD can have several major tax benefits that may make it more advantageous way to give.
Perhaps the most significant benefit of a CIRAD is that it avoids the tax code's percentage limitation on the deduction for charitable giving.
Under normal IRA rules, if you take, say, $50,000 out of an IRA and give it to charity, the $50,000 has to be included in your tax return's gross income. Then you have a charitable contribution itemized deduction. The problem is that the $50,000 contribution deduction could run into the tax law's limitation that says you can't deduct more than 50% of your adjusted gross income (AGI).
Result, you may not be able to deduct the full $50,000 contribution in the year you make it, even though the full amount of the distribution is subject to tax. The excess you don't get to deduct can be carried over and possibly deducted in the future, but in the short run, effectively you will have to come up with a way to pay tax on money you don't have because you gave it away!
And what if you don't itemize or have enough income to allow the excess to be deducted in the future? You've just lost out!
The CIRAD avoids all of this entirely. Since the distribution is never included in your income to begin with, it can't be taxed – ever. Effectively, you've deducted the entire amount by never including it in your income.
Another important benefit is that it avoids the phase-outs of itemized deductions and personal exemptions that some high income taxpayers face. For this year, the phase-out of itemized deductions and personal exemptions begins when you have AGI of $259,400 ($311,300 for joint filers or surviving spouses).
Because the CIRAD isn't included in income in the first place, it will not be included in AGI. Since it is not included in AGI, it avoids artificially raising AGI and possibly triggering or increasing these phase-outs.
Another advantage of a CIRAD not raising your AGI is that it won't affect the 7.5% of AGI floor for medical expense deductions that taxpayers 65 and over have in 2016, nor will it affect the 2% of AGI floor for miscellaneous itemized deductions, both of which could be important.
Taxpayers who take the standard deduction because their itemized deductions aren't large enough may also find a CIRAD beneficial. The CIRAD allows you to effectively get both the standard deduction and a charitable contribution deduction (by avoiding its inclusion in your income, as discussed above).
Here's a biggy for many seniors! If you are on Social Security, you probably know that an increase in your income can sometimes cause some of your Social Security benefit to be taxed (or increase the taxable amount). By not being in your AGI, the CIRAD will not cause or exacerbate this problem.
Also, the CIRAD can be used to satisfy a taxpayer's annual required minimum distribution from his or her IRAs.
One final thought – some advisors suggest the use of life insurance coupled with a CIRAD as a way to maximize the amount a charity will receive. Under this planning technique, the charity might use the CIRAD to purchase a single premium life insurance policy on the donor's life, thus increasing the amount the charity will ultimately receive.
A note of caution – not all states recognize a CIRAD. Arkansas, for instance, adopted the previous CIRAD provisions through 2014. However, the state has not yet adopted the federal law provisions making CIRADs permanent. While there is an expectation that it will do so, possibly retroactively, at this time that is not the case.
