AnnuityAdvisors - Where advisors go for advice
We often receive queries about the tax consequences of “transferring” money from an IRA to a charity. There is a widespread belief that money can be moved from an IRA to a charity without any tax effects or tax reporting. One caller recently asked if it was possible to merely “re-title” mutual funds held as an investment of an IRA into a charity’s name. Unfortunately, it is not.

Whatever process is used, moving money from an IRA to a charity is treated for tax purposes as a two-step transaction: (1) a taxable withdrawal from the IRA, and (2) a charitable contribution to the organization involved. One might ask, “What’s the difference, isn’t it a wash; doesn’t the charitable deduction offset the income recognized?” Sadly, the answer is not necessarily.

There are limitations on charitable contribution deductions. First, a taxpayer must itemize deductions in order to benefit. Second, deductible contributions cannot exceed 50% of Adjusted Gross Income (AGI) and lower deductibility limits apply to contributions of appreciated property and contributions to certain private foundations. Third, itemized deductions, including charitable contributions, are reduced by 3% of AGI in excess of a certain threshold ($132,590 for most taxpayers in 2001). Given these limitations, it may be possible that for some individuals, taking money from an IRA and giving it to charity could lead to an income tax liability.

Given this background, we note with interest a provision in President Bush’s tax proposal that would allow a tax-free transfer of money from an IRA to charity. As of this writing (May 2001), the matter is still being debated in Congress, and we don’t know whether this provision will, or won’t, be in the final bill. Under the proposal, a taxpayer over age 59-1/2 could transfer money from an IRA to a charity and the amount transferred would not be included in the taxpayer’s AGI for any purpose.

Additionally, the transfer from an IRA to a charity would be treated as a distribution for Required Minimum Distribution (RMD) purposes. Thus, a taxpayer over 70-1/2 who is lucky enough to not “need” the money and is charitably motivated, could arrange to transfer an amount equal to the RMD from his/her IRA directly to a charity each year and satisfy the RMD requirement without paying any tax. Under the President’s proposal, this provision would take effect for transfers made after December 31, 2001.

Another planning idea that immediately jumps to mind is the use of IRA money to fund a Charitable Remainder Unitrust (CRUT). Many advisors have toyed with this idea in the past, but given up because the taxpayer would have to pay tax on the entire amount in the year of withdrawal from the IRA, but the offsetting charitable deduction would be limited to the present value of the remainder interest. Would the idea work under the President’s proposal? We don’t know at this point; the explanation of the proposal states the exclusion from AGI would apply only if “the individual does not receive any benefit in exchange for the transfer.” A review of the final provision language (if passed) would be necessary to see if funding a CRUT would be feasible.

Printed with the permission of Advanced Underwriting Consultants

Last Updated: 12/15/2002 11:53:00 AM