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The Amazing Charitable IRA Rollover Gift and Bunching Strategies

IRA Rollover:  If you are at least 70 ½ years old, you can make a direct charitable gift to charity of up to $100,000 in a single year from your IRA account without having to pay federal tax on the withdrawal. This permanent American tax provision was preserved in the Tax Cuts and Jobs Act of 2017. Plus, such a gift will qualify for your “required minimum distribution.”

Consider a hypothetical: Ms. Donor is single, never married, and at age 71 must take her required distribution before next December 31. In her case, she must withdraw close to 4 percent of the total value of her $1.2 million IRA, or more than $45,000. In the process, she must pay ordinary income tax on the amount.

Instead of making the withdrawal, she makes a distribution of $45,000 to her charities of choice through her IRA administrator. This amount that is “rolled over” to the charities is not subject to federal income tax and it satisfies her mandatory distribution.

Because the money goes directly to the various charities, there is no income tax charitable deduction. Had Ms. Donor taken the distribution directly instead, and then given it to the charities, she could have claimed a charitable deduction, but the distribution would have been taxed. If she can use the entire deduction, it will offset the taxable distribution, and the net effect will be the same as a direct rollover from her IRA. However, if she does not itemize, she may be worse off financially from the tax consequences.

Another option for Ms. Donor, if she feels that her IRA income will not be needed for the foreseeable future, is to use the maximum annual benefit of the Charitable IRA Rollover and transfer all of part of her required minimum distribution to establish permanent charitable endowments or temporary charitable funds for the benefit of her favored charities.  This strategy effectively advances several years of giving and reduces the size of her IRA without paying federal tax. It also affords her the opportunity to maintain gifts to charities even in years in which she does not itemize.  But be advised: under the new legislation, IRA rollovers as described above cannot be transferred into Donor Advised Funds.

Bunching:  The Tax Cuts and Jobs Act increased the standard deduction, nearly doubling it o $12,000 for singles and $24,000 for married couples who file jointly.  It also eliminated certain personal exemptions.  About 49 million taxpayers, or 28 percent, currently itemize, according to the Urban-Brookings Tax Policy Center.  Due to the higher standard deduction, fewer filers are expected to do so in the future.

More than 36 million filers claimed the charitable-giving deduction on their 2015 taxes, according to the IRS.  However, filers who plan their charitable gifts may be able to get themselves over the new standard deduction and itemize — if they use a strategy called “bunching.”

“You would give the same amount of dollars that you would over a two-year period, but you bunch them into one year,” said Charlie Douglas, partner and director of wealth planning at Cedar Rowe Partners in Atlanta.  “Bunching in one year will help you itemize deductions where you couldn’t,” he said.

Here’s what you should know about bunching your charitable gifts, according to Darla Mercado, a personal finance writer for CNBC.com. The tax overhaul took away many of the levers taxpayers could use to ramp up their deductions so that they could itemize on their taxes.  For instance, filers could previously take an unlimited deduction every year for property and state income taxes. Now, they are only allowed to claim up to $10,000 in these expenses each year.

The charitable giving deduction remains for taxpayers who itemize. Under the new law, this break is limited to 60 percent of adjusted gross income for cash gifts, but you can carry forward by up to five years any amount that exceeds that.  Single donors who fall short of the $12,000 threshold ($24,000 if married) can itemize on their taxes if they supercharge their giving in one year.

Consider that a married couple is claiming the maximum property and state income tax deduction of $10,000. This couple also paid $6,000 in mortgage interest in a year. They will need at least $8,000 of charitable gifts in order to hit — and surpass — the $24,000 standard deduction threshold.  If this couple normally gives $4,000 to charity annually, they can accelerate the gift by cramming in two years of donations into one tax year. This way, they itemize on their taxes one year and take the standard deduction the next.

“You could do three years of gifts, even two years of gifts to get over the standard deduction,” said Tim Steffen, director of advanced planning for Baird’s private wealth management group. “Bunching deductions sounds great, but it’ll probably be talked about more than it’s implemented because of the cash commitment it will take to get over the standard deduction,” said Steffen.

Article appears as originally published in the Ohio Jewish Chronicle Thursday, March 8, 2018.

Jackie Jacobs is the Chief Executive Officer of the Columbus Jewish Foundation, the Central Ohio Jewish community’s planned giving and endowment headquarters.

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