Tax-Free IRA to Charity Distributions

A provision permits taxpayers age 70½ and over to make direct distributions (up to $100,000 per year) from their Traditional or Roth IRA account to a charity. The distribution is tax-free, but there is no charitable deduction. This provision can be very beneficial to taxpayers who have social security income and/or do not itemize their deductions. 

The key benefits of making a direct charitable IRA distribution lie in the fact that the distribution:

(1) Is not included in the taxpayer’s income for the year,
(2) Counts toward the taxpayer’s minimum required distribution for the year if any, and
(3) Does count as a charitable contribution for the year (although not a deductible contribution).

How does a taxpayer benefit from this provision?
  • By making a contribution directly from the IRA, taxpayers are able to exclude the amount that was contributed from their income for the year, which is essentially the same as deducting the contribution without itemizing their deductions.

  • This technique also lowers a taxpayer’s adjusted gross income (AGI) for other tax breaks pegged at various AGI levels, such as medical expenses, passive losses, etc., allowing them greater benefits from the AGI-limited deductions.

  • For taxpayers receiving Social Security (SS), the taxability of the SS is also based on income. Thus, excluding the portion of the IRA distribution directly distributed to the charity can, in some cases, reduce the taxable portion of the SS.

  • Taxpayers who wish to make very large contributions (up to the $100,000 limit) can do so with IRA funds that would have otherwise been taxable to them.
Caution - It is important to stress that a qualified charitable IRA contribution must be directly distributed to the qualified charity. Otherwise, the distribution is taxable as income and the charitable deduction would be taken on the taxpayer’s itemized deductions subject to all the normal limitations. If may be appropriate to call this office before attempting to execute this strategy.

Special Rules for Car Donations

Congress has imposed tough rules that substantially limit the deduction for this charitable donation.

It is common practice for charities to immediately resell the donated vehicles to a wholesaler at substantially reduced prices, generally far less than the Fair Market Value (FMV) one might consider as the listed bluebook FMV of the vehicle.  As a result and to keep taxpayers from deducting more than the charity benefited from the donation, if the deduction exceeds $500, the deduction will be limited to the gross proceeds from the charity’s sale of the vehicle.

Example: A taxpayer donates a car with a FMV of $2,000 to a charity. The charity immediately sells the car to a wholesaler for $900. The taxpayer would only be able to deduct the gross proceeds from the charity’s sale. This limits the taxpayer’s charitable contribution deduction to $900.

In addition, a written acknowledgement from the charity is required and must contain the name of the donor, donor’s tax ID number and the vehicle identification number (or similar number) of the vehicle. The IRS  Form 1098-C incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. This form must be obtained within 30 days of the sale of the donated vehicle. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat or airplane.

There is an exception to these rules for donated vehicles which the charity retains for their own use “to substantially further the organization's regularly conducted activities” or sells it at a price significantly below FMV (or gives it away) to a needy individual in direct furtherance of the charitable purpose of a donee of relieving the poor and distressed or the underprivileged who are in need of a means of transportation. Please call this office for more information.

What is a Charitable Organization?

Money or property that you donate to "qualified" charitable organizations can be included in your itemized deductions as a charitable contribution. But what is a "qualified" charity? The IRS provides an on-line search for qualified organizations.

A qualified charitable organization will fall into one of the following categories:
  • Churches, synagogues, temples, mosques, and other religious organizations. 

  • Federal, state, and local governments, if your contribution is solely for public purposes. This generally includes local government, public schools, Indian tribal government, and governments of U.S. Possessions.

  • Nonprofit schools and hospitals. 

  • Nonprofit volunteer fire companies, public parks and recreation facilities, and civil defense organizations.

  • Organizations organized and operated for charitable purposes, such as the Salvation Army, Red Cross, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, March of Dimes, etc.

  • Certain organizations that foster national or international amateur sports competition.

  • War veterans' organizations, including posts, auxiliaries, trusts, or foundations organized in the United States or any of its possessions.

  • Domestic fraternal societies, orders, and associations operating under the lodge system.

  • Certain Canadian and Mexican charities allowed by treaty - however, generally to deduct your contribution you must have income from sources within the country.

If you have questions regarding a specific charity or charitable contribution, please feel free to inquire with this office.

Charitable Away-From-Home Travel

Charitable deductions are allowed only for travel expenses (meals and lodging included) by volunteers who do charitable work for their organization while away from home on the charity's behalf. Unlike other areas of taxes, meals are not subject to the 50% limitation. Any "significant element of personal pleasure" negates a deduction (i.e., not even partial deduction is allowed). Significant personal pleasure is assumed if the taxpayer has only minor duties and is not required to perform any duties for the charity for major portions of the away-from-home stay. If the taxpayer's personal vehicle is used for the charitable travel, then the taxpayer may deduct the cost of gas and oil, but not depreciation, insurance or repairs. As an alternative to deducting the cost of gas and oil, the taxpayer can use the current standard mileage rate of 14 cents per mile for his charitable travel. You can also deduct parking fees and tolls whether you use your actual expenses or the standard mileage rate.

The 14 cents per mile is not inflation adjusted so the current high cost of gasoline may well make it appropriate to document the cost of gas and oil for charitable trips. As example, when this article was prepared, gasoline prices were in the range of $4.50 per gallon in many parts of the country. Assuming a vehicle gets 20 miles to the gallon that turns out to be 22.5 cents per mile just for the cost of gasoline. Where there is significant charitable usage it may be worth the time to document gasoline usage for the year.

Car expenses record requirements. If you claim expenses directly related to use of your car in giving services to a qualified organization, you must keep reliable written records of your expenses. Whether your records are considered reliable depends on all the facts and circumstances. Generally, they may be considered reliable if you made them regularly and at or near the time you had the expenses.

For example, your records might show the name of the organization you were serving and the dates you used your car for a charitable purpose. If you use the standard mileage rate of 14 cents a mile, your records must show the miles you drove your car for the charitable purpose. If you deduct your actual expenses, your records must show the costs of operating the car that are directly related to a charitable purpose.

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