by Bradford N. Dewan
On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”). The PATH Act contains over 100 separate provisions, including several that incentivize charitable giving. Importantly, several of these provisions that were previously temporary are now permanent.
An example of a provision made permanent is the exclusion from income for charitable distributions made from IRAs (i.e. distributions from the IRA to a charity rather than to the IRA owner). The PATH Act reinstates and makes permanent the exclusion from gross income for qualified charitable distributions from an individual retirement account (IRA). Under pre-PATH Act law, the exclusion did not apply to distributions made in taxable years beginning after December 31, 2014.1
Ordinarily, a distribution from an IRA would be included in the owner’s gross income in the year the distribution occurs, and income taxes would have to be paid on the taxable portion of the distribution. In addition, an individual’s overall charitable contribution deduction limitation prevents the IRA owner from claiming a deduction for charitable contributions to public charities in excess of 50% of his or her adjusted gross income (30% for contributions to private foundations). The PATH Act permanently overrides both of these rules for charitable distributions from IRAs.
Under IRC Section 408 (d)(8), each year an individual age 70 ½ and older may exclude from gross income (and thereby avoid income tax) up to $100,000 of distributions from an IRA that are made to one or more qualified charities. If a couple files a joint income tax return, each spouse age 70 ½ and older may contribute (and exclude from taxable income) up to $100,000. A “qualified charity” is any organization described in IRC Section 170(b)(1)(A), other than a supporting organization described in IRC Section 509(a)(3), or a donor-advised fund described in IRC Section 4966(d)(2).2
Private Foundations. Private foundations are not qualified charities eligible to receive qualified charitable distributions from an IRA.3 However, taxpayers who want to support both an IRC Section 170(b)(1)(A) organization (such as a church, school, or other public charity) as well as their family foundation (classified as a private foundation) and who use a qualified charitable distribution to support the public charity, may then be able to make a larger contribution to their family foundation using non-IRA funds and assets than they otherwise might be able to do after considering their specific circumstances and the charitable deduction limitations.
Distributions made in accordance with IRC Section 408(d)(8) do not apply toward the overall charitable deduction limit, so a donor may make tax-free contributions in excess of 50% of his or her adjusted gross income.4 Because the charitable distribution is excluded from income entirely, a donor does not need to itemize his or her deductions to get the tax benefit from the distribution to a qualified charity.
Charitable Deduction. In order for the IRA Section 408(d)(8) exclusion to apply, a charitable contribution deduction for the entire IRA distribution must be otherwise allowable (without regard to the percentage limitations referenced above). Thus, for example, if the amount of the deduction would be reduced because the donor received a benefit from the charity in exchange for the contribution, or if the deduction would not be allowable because the donor did not obtain adequate substantiation, the exclusion from income would not be available for any part of the IRA distribution.
Specific Requirements Must Be Met. To take advantage of this provision, a donor must make the contribution from a traditional or Roth IRA. Importantly, contributions from employer-sponsored IRAs, SEP-IRAs, SIMPLE-IRAs, and defined contribution plans (such as 401(k) or 403(b) plans) are not eligible sources for the charitable contributions. Also, in order to be excluded from the income of the IRA owner, the contribution must be made directly from the IRA to the charitable organization. An IRA owner who takes a distribution from the IRA and later contributes that money to a charitable beneficiary cannot exclude the IRA distribution amount from his income (although he or she might be entitled to claim a charitable contribution deduction under IRC Section 170). Consequently, most IRA custodians now have specific forms for the IRA owner to complete which direct the custodian to either send a check to the charitable organization or to wire the funds directly into the bank account of the charitable organization.
1. Pre-PATH Act IRC §408(d)(8)(F)
2. IRC §408(d)(8)(B)(i)
3. IRC §408(d)(8)(B)(i), 170(b)(1)(A)
4. IRC §408(d)(8)(E)