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What is the IRA Charitable Rollover, and Why is it Important?

In the world of tax reform, if the IRA Charitable Rollover were a movie, it would be Groundhog Day.  This charitable provision seems to keep coming around, the same way every year, and we are not sure why that is happening.  For many of us, the IRA Charitable Rollover is the equivalent of Bill Murray’s experience with Punxsutawney Phil.

The IRA Charitable Rollover is in the news again because of congressional activity on tax extenders (more on that later).  Here’s what you need to know to make you the expert when the IRA Charitable Rollover inevitably comes up as a topic of conversation at holiday parties this season.

What is the IRA Charitable Rollover?

First of all, do not be distracted by the fact that an online search for this topic turns up, “Easy Tricks to Teach Your Dog.”  The real answer is that you are required to begin taking distributions from your Individual Retirement Account (IRA) at age 70-1/2.  These distributions are subject to income taxes, and this is where the IRA Charitable Rollover comes into play.  This provision allows you, beginning at age 70-1/2, to donate up to $100,000 to charitable organizations directly from your IRA, without treating the distribution as taxable income.

Why is the IRA Charitable Rollover important?

Simply put, this provision is an incentive that strengthens charitable giving and reduces the tax burden on older Americans.  The nonprofit network organization, Independent Sector, reports, “In the first two years the IRA Charitable Rollover option was available, more than $140 million was donated from IRAs to support the work of public charities across the U.S.  The median gift was just under $4,500.”

Why we experience the Groundhog Day effect with the IRA Charitable Rollover

This provision keeps coming up because it has not been made permanent since it was established as a two-year temporary measure in the 2006 Pension Protection Act.  The IRA Charitable Rollover was allowed to expire in 2008; it was renewed temporarily two more times, and then expired again on January 1, 2014.  This charitable provision currently remains in the realm of tax reform uncertainty as we enter prime time for 2014 year-end charitable giving.

How to take action on extending the IRA Charitable Rollover

If you are thinking that the IRA Charitable Rollover seems like a no-brainer, you are not alone.  Many individuals and charitable organizations are contacting their senators to encourage them to pass the House bill on extending the tax extenders for one year, retroactive for 2014. (Stay with me here, we are about to bring it home.)  You can learn more about the IRA Charitable Rollover as part of the total package of 55 tax extenders, how to contact your senators, and a sample letter.

Update 12/17/14

Last night, the Senate passed the bill to extend the tax enders for 1 year, retroactive for 2014.  It looks promising for the bill, H.R. 5771, to be signed by the president later this week.

Update 12/19/14 — Tax Bill Signed by the President

Today the president signed H.R. 5771, extending the tax extenders–including the IRA Charitable Rollover–for one year, retroactive for 2014.