Much gnashing of teeth in the nonprofit sector over this, and some considerable disappointment the thing has not yet been made permanent.
And there is a longer term agenda to increase the limit on the amount that can be "rolled over," presently 100k, and to allow taxpayers as young as 59.5 to use the device to contribute tax-deferred funds to split interest trusts.
I have an entire rant pent up somewhere about how the sector betrays an appalling cynicism by focusing so narrowly on tax benefits for high-income donors. But here I just want to let the bare facts speak more or less for themselves.
How the charitable IRA "rollover" works is this. You are age 70.5 or older, therefore you are taking minimum required distributions from your IRA. These are taxed as income at let us say 39.6 pct. Also, you are making contributions to (c)(3) organizations.
You could claim those contributions, up to fifty pct. of adjusted gross income, as itemized deductions. And/or, whenever Code section 408(d)(8) happens not to have expired, you could direct the trustee to make distributions from the IRA directly to charity.
These would not be reportable as income, and while they would also not be deductible, they would not count against your fifty pct. limitation. But they would count toward your minimum required distribution.
Under what circumstances might you want to do this.
One, maybe you do not itemize. Two, maybe you have already maxed out the fifty pct. limit. Or three, maybe taking the MRDs into income would push you over the threshold where the "Pease" limitation on itemized deductions kicks in, and/or the 3.8 pct. Medicare surtax on net investment income.
Let us look at each of these in turn. And to keep it simple, we will look at joint filers. But first some basic data.
Calendar 2012 filing data
Of 53.7 million joint filers for calendar 2012, about 25.9 million itemized, slightly under half. Of these, 22.8 million claimed charitable contribution deductions, aggregating 142.9 billion, or an average of 6.3k per return. State and local taxes paid averaged 13.6k per joint return, and mortgage interest averaged 11.2k.
Altogether, 37.4 million filers claimed charitable deductions in 2012, aggregating 199.3 billion, or an average of 5.3k per return. Clearly, joint filers made up the bulk of these numbers. Nearly one-quarter of joint filers had adjusted gross incomes between 100k and 200k.
Fewer than 2.5k returns reported itemized deductions triggering the "Pease" limitation. Most of these were just above the threshold, but almost all of the dollar value was on returns reporting adjusted gross income of ten million or more. Ten million.
About 13.2 million taxpayers took taxable IRA distributions in 2012, aggregating 230.8 billion, or about 17.5k per return. Of these, 7.8 million were joint filers, reporting taxable IRA distributions aggregating 157.4 billion, or about 20.2k per return.
It is not until you get into income ranges above one million that you see IRA distributions averaging above 100k per return. In 2012 there were 11.4 million joint filers over age 65. Only 69k reported income over one million, about six-tenths of one pct. Some apples in among the oranges here, but you get the general idea.
What about nonitemizers
The standard deduction for 2014 for joint filers is 12.4k. Oh, and since we are talking about people over age 65, another 1.2k each, total 14.8k.
Of 97.2 million filers who claimed the standard deduction in 2012, well over half had adjusted gross incomes below 25k, less than 200 pct. of the federal poverty level for a family of two.
But about 10.8 pct. were in the 50k to 75k range, and another 4.7 pct. were in the 75k to 100k range, so let's suppose we are talking about those guys. Dick and Jane, both in their 70s, taxable income on the edge between the 15 pct. marginal rate bracket, which tops out at 73.8k, and the 25 pct. bracket, which tops out at 148.85k.
Add back the 14.8k standard deduction and two personal exemptions at 3.95k each, we are looking at AGI right around 96.5k.
Absent whatever they might want to give to charity in the form of an IRA "rollover," their itemized deductions are less than 14.8k. Not much medical expense in excess of 7.5 pct. of AGI, not much in the way of deductible state and local taxes, not much or any home mortgage interest.
If Dick and Jane are completely typical for their income bracket, again using 2012 figures, their taxable IRA distributions would be 13.125k. If they took this into income and then contributed some or all of it to charity, a portion of the deduction would be "wasted" until they hit the 14.8k threshold.
You gotta do a little math there to find out how much you can take into income versus how much you want to put into the "rollover" to get the maximum benefit. I have a four-function calculator here.
So that is one scenario. What about the 50 pct. contribution limit?
Maxing out the fifty pct. limit
So here we are supposing Dick and Jane have already given somewhere around 48.25k to charity, which of course would make them very unusual in this bracket. But in a moment, when we are looking at the "Pease" limitation and the 3.8 pct. Medicare surtax on net investment income, this might make more sense.
In any event, if Dick and Jane took the MRDs in above the line, yes it would increase AGI and raise the limit, but they could only give about half to charity without having to carry some forward. The carryforward is wasteful in the sense you are paying tax today on something you will be deducting next year. The time value of money or something.
Crossing the thresholds
The threshold for imposing the 3.8 pct. Medicare surtax on net investment income is 250k for joint filers, near the lower end of the 33 pct. marginal rate bracket. If Dick and Jane have both retired, it may be unrealistic to assume their net investment income is less than the amount by which their adjusted gross might exceed the surtax threshold.
So as a practical matter their marginal rate is 36.8 pct., even though any distributions they take from IRAs are not literally subject to the surtax.
The AGI threshold at which the "Pease" limitation begins to reduce itemized deductions for joint filers is 305.05k in calendar 2014. So let us put Dick and Jane right at that edge, solidly in the 33 pct. marginal rate bracket, with at least 55.5k of net investment income. The floor for the 35 pct. bracket is 405.1k for joint filers.
At this income level, incidentally, average taxable IRA distributions are more in the neighborhood of 50.1k.
Again, the "Pease" limitation reduces itemized deductions by the lesser of three pct. of the amount by which AGI exceeds the threshold or eighty pct. of itemized deductions otherwise allowable. In effect, if Dick and Jane are itemizing, each additional dollar of income over 305.05k is taxed at 33.99 -- actually, at 37.79 pct., because of the surtax --, while itemized deductions reduce taxable income by only 33 pct.
So if Dick and Jane took 50.1k in MRDs into income above the line and contributed all of it to charity, assuming itemized deductions already exceeded 14.8k, they would end up paying an additional 2.4k in tax, roughly. Again with the four-function calculator.
Obviously it gets a little more complicated when you are at the edge of the next marginal rate bracket.
Let us say Dick and Jane are sitting right at 405.1k before taking MRDs. Again, assuming enough net investment income that the 3.8 pct. surtax will apply to every additional nickel. We are still in an income range where the average taxable IRA distribution is 50.1k.
Here the marginal rate above the line would be 39.394 pct., with the "Pease" limitation effectively taxing each additional dollar as 1.03, while itemized deductions would reduce taxable income by only 35 pct. So if Dick and Jane took the entire IRA distribution above the line and contributed it all to charity they would pay an additional 2.487k in tax, roughly.
Half of one pct. of their gross income.
Some closing thoughts
The Joint Committee on Taxation estimates reinstating the charitable IRA "rollover" retroactively for 2014 will cost 239 million in revenue in 2015 alone. I recognize the JCT's methodology is not quite this simple, but even assuming everyone is in the 39.6 pct. marginal rate bracket, this would suggest at least 603.5 million in contributions that would otherwise not have been made or would at least to some extent have been made from otherwise taxable distributions. Taxable IRA distributions in 2012 totaled 229.0 billion.
The tax policy behind allowing you to defer recognition of wages you put into an IRA, and of the return on those deferrals, is to encourage you to save for retirement. Not to create an inheritance. When you turn 70.5 you have to start taking the money out over your projected life expectancy, 24.7 years, and paying income tax.
To the extent you do not need the money, the tax incentive is inefficient. But we have created a sweet cottage industry for planners to "stretch" IRAs over the lives of whomever.
As I mentioned at the top of this piece, some players in the nonprofit sector have been lobbying to increase the limit on the charitable IRA "rollover" to at least 500k, maybe chuck it altogether.
The average IRA balance for taxpayers aged 70 and over is less than 200k. If at age 70.5 your minimum required distribution is 100k, this means you have 2.47 million in the account. If your minimum required distribution is 500k -- well, again I would refer you to the four-function calculator.