Batts Morrison Wales & Lee - News & Resources - Nonprofit Special Alert

Congress Passes Extension of Exclusion for Direct Charitable IRA Distributions through 2014

URGENT!

Congress Passes Extension of Exclusion for Direct Charitable IRA Distributions through 2014…President Expected to Sign…Only Days Left for Donors to Take Advantage

Sample Notice for You to Send to Your Donors Provided Below

By: Michael E. Batts, CPA

Congress has passed and President Obama is expected to sign last-minute legislation that re-extends through 2014 the exclusion for direct charitable IRA distributions by taxpayers 70½ years old and older.  That exclusion had expired as of December 31, 2013.  The renewal is retroactive for all of 2014. The legislation does not include any special provisions for relief associated with the fact that the legislation was passed at the very end of the year to which it applies.

Nonprofit organizations that are eligible recipients of direct charitable IRA distributions should consider notifying their donors of this limited-time opportunity immediately upon President Obama’s approval of the legislation.

We have provided sample text below for such a notification.

Refresher – Overview of the exclusion for direct charitable IRA distributions
The direct charitable IRA distribution exclusion allows qualified distributions from an IRA to be excluded from the taxable income of a donor. Such treatment is favorable to certain donors since distributions from a regular IRA are ordinarily taxable and the donor’s ability to deduct a charitable contribution may be limited based on his or her specific circumstances.  Additionally, such treatment permits the donor to have a lower adjusted gross income, which may be beneficial for other reasons.

Nonprofit organizations wishing to attract such gifts need to be aware of the following special conditions and restrictions that apply under the law:

  • The donor must be 70½ or older on the date of the transfer;
  • The transfer must be made directly by the IRA’s trustee to the donee organization;
  • The donor may not receive any goods or services in exchange for the gift (or any part of the gift);
  • The donee organization must generally be a U.S.-based 501(c)(3) organization and may not be a supporting organization, a donor-advised fund, or a nonoperating private foundation;
  • The exclusion is limited to $100,000 per year per donor;
  • The exclusion is now scheduled to expire on December 31, 2014 (assuming President Obama signs the legislation); and
  • The donor must obtain a proper charitable contribution acknowledgment prior to filing his or her tax return for the year of the distribution.

Let’s take a closer look at a few of these requirements.

Direct transfer required. The donor must have the IRA custodian or trustee make the transfer directly from the IRA account to the donee organization. The donor may not take a distribution personally and then contribute it to the charity without triggering taxation of the distribution. This is a very important requirement for which nonprofit organizations should watch when encouraging such gifts from donors.

Only certain types of 501(c)(3) organizations are qualified recipients. Another subtle provision in the law that is easily overlooked is the stipulation that the donee organization may not be a supporting organization, a donor-advised fund, or a private nonoperating foundation. While most nonprofit executives would know whether their organization maintains donor-advised funds or is a private foundation, many leaders may not know if their organization is a supporting organization. A supporting organization (described in Section 509(a)(3) of the Internal Revenue Code) is a type of 501(c)(3) organization that, by its nature, exists to support one or more other nonprofit organizations. A classic example of a supporting organization is a fundraising foundation that supports a specific “parent” nonprofit organization, such as a church, a school, a college, or a museum. Supporting organizations are not qualified recipients of direct charitable IRA distributions.

Donor must receive proper acknowledgment of contribution. In order for a direct charitable IRA transfer to be excludible from a donor’s taxable income, the transfer must meet the requirements that would otherwise apply for a deductible charitable contribution. (Note, however, that with a qualified direct charitable IRA transfer, the donor does not actually get a charitable deduction; he or she is permitted to exclude the distribution from taxable income instead.) The ordinary rules for charitable contributions require a donor to obtain a proper acknowledgment from the donee organization for individual gifts of $250 or more. The donor must have the acknowledgment before filing his or her tax return for the year of the gifts. Accordingly, a donor must have a proper acknowledgment for a direct charitable IRA distribution before filing his or her tax return for the year of the distribution. The acknowledgment should indicate the name and address of the donee organization, the name of the donor, the specific dates and amounts of the gifts, and a statement that no goods or services were provided in exchange for the gifts. (Note that receipt by the donor of any goods or services that would reduce the deductible amount of an ordinary charitable contribution will disqualify a direct charitable IRA distribution.) While not specifically stated in the law, and subject to possible future federal regulations that may state otherwise, our firm recommends that the donee organization acknowledge and specifically identify any gifts that are direct IRA distributions separately from regular charitable contributions.

 

Sample Text for Notification to Your Donors

[Note – As a precaution, we recommend that you wait until President Obama has signed the legislation, known as the 2014 Tax Increase Prevention Act or HR 5771, to send this notification to your donors. BMWL will issue a separate Special Alert when President Obama signs the legislation.]

Subject/Header:
Congress Passes Extension of Exclusion for Direct Charitable IRA Distributions through 2014… Only Days Left for Donors to Take Advantage

Dear ___:

Congress has passed and President Obama has signed last-minute legislation that re-extends through 2014 the exclusion for direct charitable IRA distributions by taxpayers 70½ years old and older.  That exclusion had expired as of December 31, 2013.  The renewal is retroactive for all of 2014. The legislation does not include any special provisions for relief associated with the fact that the legislation was passed at the very end of the year to which it applies.

Some taxpayers who meet the criteria for making direct charitable distributions from their IRAs may realize a substantial tax benefit by taking advantage of this opportunity before the end of the year.  For taxpayers who qualify, up to $100,000 per taxpayer may be excluded from income under this provision of the law.  If you believe that such a gift may be appropriate for you, we encourage you to promptly consult with your tax advisor and IRA custodian, as this limited window of opportunity in the tax law expires under current law at the end of this month – December of 2014. Also, please let us know if we can help you facilitate such a gift in any way by contacting _______ at _____________________.

Thank you for your faithful support of _______.

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