November is an excellent month to consider plans for charitable gifts. These gifts could include an IRA charitable rollover, a gift of cash or a gift of appreciated stock or land.
1. IRA Charitable Rollover
The IRS refers to the IRA charitable rollover as a qualified charitable distribution (QCD). An individual age 70½ or older is permitted to make a transfer directly from his or her IRA custodian to a qualified nonprofit. The transfer is not included in taxable income. If the IRA owner is over age 73, the distribution may fulfill part or all of the required minimum distribution (RMD).
Because many individuals have invested their IRAs in stocks, bonds or other securities, it may be necessary to exchange the IRA stock or bond accounts for a money market fund prior to the distribution. Most custodians require a QCD to be paid from a money market account or similar fund.
There are some limits for the IRA rollover. The IRA owner must be at least age 70½ and the maximum transfer in 2023 is $100,000 ($105,000 in 2024). The transfer must be to a qualified exempt nonprofit and may be for a designated purpose or field of interest fund. However, it may not be to a donor advised fund or supporting organization. In addition, it may not be for a nonprofit dinner or other event that involves a partial benefit to the donor. The entire QCD must be for a qualified charitable purpose.
2. Gifts of Cash
Individuals who itemize deductions may deduct gifts of cash up to 60% of their contribution base, which is usually adjusted gross income (AGI). A couple with $100,000 in income may give and deduct up to $60,000 this year. While the 60% of AGI limit is substantial, some generous individuals give more than this and may carry forward and deduct the excess gift amounts during the next five years.
3. Gifts of Stock
With the increased value of many technology stocks in 2023, many donors find that a gift of appreciated stock is attractive. A gift of appreciated stock provides two benefits. A charitable contribution deduction is based on the fair market value of the stock and there is a bypass tax on the capital gain. If a donor purchased stock five years ago for $10,000 and it is now worth $30,000, the donor could pay capital gains tax on $20,000 if the stock is sold. By giving the stock to a nonprofit, a donor receives a deduction for the $30,000 in value and bypasses the tax on the $20,000 of potential gain.
4. Gifts of Land
With substantial increases in value for real property, many donors will find that a gift of appreciated property is attractive. A gift of appreciated land provides two benefits for the donor. First, the donor may receive a charitable contribution deduction for the fair market value of the land. Second, the donor can bypass tax on the capital gain. If the donor purchased development land 10 years ago for $50,000 and it is now worth $250,000, the donor would pay capital gains tax on $200,000 if he or she sold the property. However, by giving the land to a nonprofit, the donor may receive a deduction for the $250,000 in value and bypass the tax on the $200,000 of potential gain. Because the donor is receiving both the deduction and capital gain bypass benefits, this type of charitable deduction is permitted to 30% of adjusted gross income (AGI). If the gift value is in excess of this limit, it may be carried forward for five additional years. For example, Mary Smith has adjusted gross income of $100,000 this year and makes a gift of appreciated land with fair market value of $80,000. She is able to deduct $30,000 this year, carry forward $50,000 and deduct that amount over the following five years.
Many donors make their largest gifts in November or December. This is a good time to plan ahead and consider options for gifts this year.
IRA and 401(k) Contributions in 2024
In Notice 2023-75; 2023-47 IRB 1, the Internal Revenue Service (IRS) announced 401(k) and IRA contribution limits for 2024. The IRA limit is $7,000 in 2024. Individuals over age 50 may make a catch-up contribution of $1,000, for a total transfer of $8,000.
Traditional IRA contributions create two main tax benefits contributions are tax deductible and grow tax free. If a taxpayer is covered by a qualified retirement plan by an employer, the IRA deduction may be reduced or phased out.
- Single Taxpayers with Workplace Plan IRA contributions for single taxpayers are phased out for persons with incomes from $77,000 to $87,000.
- Married Couple with Workplace Plans The phaseout range for a married couple with joint income is $123,000 to $143,000.
- Married and No Workplace Plan If one person has no workplace plan and the spouse is covered in his or her workplace, the phaseout range on a joint return is $230,000 to $240,000.
A Roth IRA is funded with after-tax income. It grows tax free, and most distributions are tax free. Once the Roth IRA has been in existence for five years and the owner is over age 59½, both contributions and earnings can be withdrawn tax free.
The Roth IRA phaseout limits also increase in 2024.
- Single Individuals The Roth IRA phaseout for single persons next year will be $146,000 to $161,000.
- Married Couples For married couples, the Roth IRA phaseout is $230,000 to $240,000.
Many businesses maintain a 401(k) plan and most nonprofits provide a 403(b) plan. The 2024 limit for an employee contribution to a 401(k) or 403(b) plan is $23,000. Employees over age 50 may make a catch-up addition of $7,500, for a total transfer limit of $30,500.
If your employer offers both a traditional 401(k) and a Roth 401(k) plan, you may allocate your employee contribution to one or both funds. The traditional 401(k) amounts are deductible, but the Roth 401(k) contributions are after-tax.
Many employers match the employee 401(k) contributions. This is a good way to encourage employee participation in the 401(k) plan. The employer match is used to fund the employee's traditional 401(k) account. The employee may still make contributions to a Roth 401(k) account up to the $23,000 or $30,500 limit.
Qualified Charitable Distributions in 2024
The qualified charitable distribution (QCD) limits for outright IRA gifts to nonprofits or a life income plan will increase in 2024.
- QCD to a Qualified Nonprofit The Sec. 408(d)(8)(A) distribution directly from the IRA custodian to a qualified nonprofit (not a donor advised fund or supporting organization) is increased from $100,000 to $105,000.
- QCD to a Life Income Plan The Sec. 408(d)(8)(F) distribution from the IRA custodian to a charitable remainder unitrust (CRUT), charitable remainder annuity trust (CRAT) or charitable gift annuity (CGA) is increased from $50,000 to $53,000.
IRA rollover gifts may be made to Sec. 509(a)(1) and Sec. 170(b)(1)(A) public charities. The Internal Revenue Code describes an IRA transfer to charity as a "qualified charitable distribution" under Sec. 408(d)(8). In most cases, IRA rollover gifts will be a transfer from a traditional IRA to a public charity for the general purposes of that charity. However, it is permissible to make a transfer to a field of interest fund or for a qualified charitable purpose. For example, a QCD from an IRA owner age 75 to a college or university for a particular scholarship fund is permitted. Similarly, a transfer to a relief organization for a specific disaster relief fund is also acceptable.
Many tax advisors were concerned that IRA rollovers to pay pledges would be prohibited. However, since the IRA funds are owned by the IRA owner, they may be used to fulfill a legally binding pledge. The transfer from the IRA owner to the charity is treated as a receipt by the owner under Sec. 4975(d)(9) and, therefore, the IRA rollover is not a prohibited transaction. See Notice 2007-7.
There are a number of restrictions on the "qualified charitable distribution" (QCD). The QCD may not be made to a Sec. 509(a)(3) supporting organization (SO) or to a donor advised fund (DAF) described in Sec. 4966(d)(2). Since the rollover is limited to organizations in Sec. 170(b)(1)(A), private foundations are also excluded, except for the conduit private foundation.
Finally, the "entire distribution" transferred to the charity must qualify for a Sec. 170 charitable deduction. Sec. 408(d)(8)(C). Therefore, a "quid pro quo" transfer is not permitted. The QCD may not be used to purchase a banquet table for a donor, family and friends at the annual charitable auction. Similarly, the gift may not be used to qualify for preferential seating at athletic events or other types of "quid pro quo" gifts.
There are IRA rollover enhancements under the Secure 2.0 Act. Individuals age 70½ or older are permitted to make distributions from their IRA directly to charity and avoid recognition of income. Section 307 of the Secure 2.0 Act created a one-tax-year QCD under Sec. 408(d)(8)(F) of $50,000 ($53,000 in 2024) from an IRA to a life income plan.
The life-income IRA distribution may be to a charitable remainder annuity trust, a standard payout charitable remainder unitrust or an immediate charitable gift annuity. A net income plus makeup unitrust or a deferred payment gift annuity are not qualified charitable entities. The distribution must be to a charitable remainder trust with the remainder interest vested in an exempt nonprofit. For a charitable gift annuity, it must have a 5% or higher payout rate and be qualified under Section 501(m)(5)(B).
The lifetime income must either benefit the IRA owner, the IRA owner's spouse or both the IRA owner and spouse. All payments from a charitable remainder trust will be ordinary income. Because there is no investment in the contract under Section 72(c), all payouts from the gift annuity will also be ordinary income.
Applicable Federal Rate of 5.6% for November -- Rev. Rul. 2023-20; 2023-45 IRB 1 (15 October 2023)
The IRS has announced the Applicable Federal Rate (AFR) for November of 2023. The AFR under Sec. 7520 for the month of November is 5.6%. The rates for October of 5.4% or September of 5.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return. Charitable gift receipts should state, "No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property."