IRA Charitable Rollovers

Of course, one shouldn't donate money if they might need it.

This benefit just turns a potential non-deduction into a pseudo-deduction. For a retiree in that odd area where Social Security is getting taxed, their taxable income may look like 15 or 25% bracket, yet the impact is the next $1000 of RMD causes tax to rise $400 or more.

So it's a question of whether the client has the combination of not itemizing and the charitable intent. I wrote about this when the IRA charitable rollover first started and was criticized, "Joe, giving away $1000 to save $400 in taxes makes no sense." Perhaps not, but when I ask if the taxpayer has any charitable intent over the next year it's just a bit of paperwork to put $400 in her pocket.

The same thing could be said about any discretionary spending. E.g., substitute taking an expensive vacation, funding a grandchild's college education, or frequenting fancy restaurants for making charitable contributions. One of the nice things about having some money is that you can do what you want with it, even to the point of causing yourself "unnecessary" financial grief.

Dave

Maybe I am missing something here. I assume that an IRA Charitable Rollover lets me give money directly to the charity and count the money towards RMD. Why is that a good idea?

Consider the example where I want to give an amount equal to the standard deduction to my charity. I do not itemize because my allowable deductions are only 50% of the standard deduction.

Case 1 I rollover the gift directly to the charity. I take the standard deduction the rollover counts for RMD.

Case 2 I take the money, an amount equal to the standard deduction, as income and deduct it as a charitable expense. Now I can also deduct the additional allowable deductions I have. My total deductions are

Am I wrong?

No one is arguing that you shouldn't act so as to minimize your tax bill. Depending on your circumstances, either choice might be best for you. E.g., the answer probably would change if you wanted to contribute no more than $5,000.

Another consideration is that if you take the distribution, it adds to your taxable income, which may make some of your Social Security taxable, depending on your other income. This may exceed the benefit of deducting the other expenses. Donating directly to the charity avoids this.

Dave

You don't itemize. So in that case, the first $2900 of potential donations (1/2 the STD deduction) gain you nothing tax wise.

If you came to me and said "Joe, I'm not looking to donate my money, just minimize my taxes" then do not do this. If, however you said you plan to donate $2900 in 2011, by doing it through the charitable rollover/transfer, you save $2900 x your marginal rate. Otherwise, you'd still have just the standard deduction.

Yes, there are cases where the next $100 is taxed at higher than the bracket you appear to be in, in which case your savings is a bit higher for the effort/paperwork. Not to beat a dead horse, but the conversations don't start with me promoting charity, it's by my observing the taxpayer's history of donations along with their taking the standard deduction. I give them paperwork, and from their perspective I just pulled money out of thin air. The charity sees nothing different and the client is better off on their 1040.

Good point. Also, don't overlook the impact that IRA withdrawals have on Medicare Part B premiums.

Yes, you are wrong, Dummy! (N. B. I am the OP.)

Under case 2, your deductions went up by 50% but your income went up by 100%, the money withdrawn. So you are paying taxes on the 50% difference.

Rollover is a good idea.