Tax Benefits for Charitable Farmers with Traditional IRAs
Beginning each year after turning age 70½, individuals with traditional IRAs (Individual Retirement Accounts) must take required minimum distributions (RMDs) from their accounts. Taxpayers typically treat these amounts as taxable income in the year received. With the passage of the Protecting Americans from Tax Hikes Act (PATH), Congress made permanent a special provision that could provide favorable tax treatment when some or all of a required minimum distribution goes directly to charity. The following example illustrates this potential benefit.
Suppose, for example, Joe and Mary Brown retired seven years ago at age 65. They own their property free and clear and live off rent from their farmland, plus social security benefits. The majority of their annual property tax gets reported as an expense against their rental income. And while they donate $6,000 to their church each year, they don’t enjoy the benefit of a tax deduction for their charity because their itemized deductions on Schedule A fall short of the standard deduction.
Joe and Mary have traditional IRA accounts and draw a total of $7,500 in required minimum distributions from them. Under the old rules, this amount would be added to their annual income and taxed accordingly. Under PATH, Joe and Mary have the ability to make their $6,000 donation to their church (or other public charities as permitted by applicable law) directly from their IRA as a part of their required minimum distributions. With this adjustment, Joe and Mary reduce the taxable portion of their required minimum distribution to $1,500.
Individuals with high Adjusted Gross Income (AGI) may also find this treatment attractive should they experience limitations on their itemized deductions. It may also appeal to donors whose charitable gifts exceed 50 percent of their Adjusted Gross Income.
To reap federal tax benefit from this special provision, eligible IRA owners must adhere to the following guidelines (at a minimum):
- Qualified charitable contributions may not exceed $100,000 per taxpayer per year.
- Monies must transfer directly between the IRA trustee (e.g., your bank or brokerage) and the charity. If the money flows through the owner’s hands, all bets are off!
- Distributions cannot be made to a “supporting organization” (as defined by section 509(a)(3) of the IRS code) or a donor advised fund (as defined in section 4966(d)(2) of the IRS code). Likewise, they cannot be used to fund life-income gifts such as charitable remainder trusts or charitable gift annuities.
As each state has its own rules regarding charitable deductions, IRA owners should consult with their tax advisors to discuss the impact on their state filings.
To take advantage of this opportunity, eligible IRA owners must send a formal request for a direct charitable contribution to their IRA trustee with the following information:
- The IRA account number
- The amount to be transferred
- The name and address of the payee
- The name of person or persons to be acknowledged for the donation
- The date by which the transfer must be completed to qualify for treatment in the proper tax year
- Contact information for questions, comments, or confirmation
Prospective donors must allow for an appropriate lead time for their IRA Trustees to take action on their requests.
Contact us if you would like to discuss how this provision might affect your tax filings.
Meet the Author
Curtis Sawyer, CPA
Aldrich CPAs + Advisors LLP
Curtis Sawyer provides farm accounting, tax compliance, planning, and agribusiness consulting services to his clients in the agriculture industry. He works closely with businesses across several industries with an emphasis in agriculture, farming, cooperatives and food-processing, as well as closely-held businesses and their owners. Curtis also presents on topics including regulatory reform and tax savings... Read more Curtis Sawyer, CPA
- Agribusiness consulting
- Farm accounting
- Closely-held businesses
- Certified Public Accountant
- Strategic tax planning and compliance