Benefit in 2025 With an IRA Charitable Rollover
Published April 25, 2025
Each year, traditional IRA owners aged 73 and older must take a required minimum distribution (RMD). In nearly all cases, the RMD is calculated using the Uniform Lifetime Table. Under the Uniform Lifetime Table, distributions generally commence at age 73 at approximately 3.8% and increase each year based on the age of the IRA owner. The RMD must be taken by December 31 each year.
Many traditional IRA owners with larger balances take their RMD during the months of October, November and December. Because many individuals with larger IRAs do not need IRA distributions throughout the year to pay for living expenses, they often delay an RMD until the end of the year. This allows the IRA balance to benefit from additional tax-free growth during the year.
Fortunately, the IRA charitable rollover will count towards the donor's RMD. Although RMDs are not required until age 73, the IRA charitable rollover can be used by any donor once they reach age 70½. The IRS term for an IRA charitable rollover is a qualified charitable distribution (QCD) which is also the term commonly used by IRA custodians.
There are five donor profiles for IRA charitable rollover gifts. The first are the convenience donors who find it a simple method for an end of year gift. The second is the generous donor who wants to give more than the 60% of adjusted gross income (AGI) deduction limit for cash gifts. The third is a major donor who may be a generous individual looking for a favorable opportunity to make a major gift. The fourth donor is the Social Security recipient looking to reduce taxes with an IRA charitable rollover gift. Finally, a donor who takes the standard deduction can also benefit from an IRA charitable rollover gift.
Convenience Donor
Many IRA owners wait until the final months of the year to take their IRA withdrawals. As the individual approaches the end of the year, he or she will need to make decisions related to their RMD. If an IRA owner is actively making gifts to charity during the year, then using a QCD is a good opportunity to make a gift.
Convenience donors may contact their IRA custodians to arrange for an IRA charitable rollover. There is no charitable income tax deduction, but also no inclusion in federal taxable income. It is a simple and convenient way to help their favorite charity.
Generous Donor
Some generous individuals already donate up to 60% of their AGI which is the maximum limit allowed by the IRS for deduction of cash gifts each year. Any gifts over this limit may be carried forward and deducted over the following five years. Some generous donors may also have a large IRA and live at a moderate expense level and may not need their entire IRA.
If there is a desire to give more, they can give up to 60% of adjusted gross income from their cash assets and make "over and above" gifts from an IRA. Some generous donors may in effect give nearly 100% of their income per year through this method. Since the IRA charitable rollover is not included in taxable income, it will have no impact on their regular income and other charitable gifts.
Major Donor
As the rules have continually become more favorable for IRAs and required withdrawals have been reduced, IRAs balances are likely to keep growing. There are occasional market dips, but the long-term trend is positive and IRAs will continue to increase in value.
For many professionals and business owners, the IRA may become most of the estate. In these cases, it may be desirable to do "asset balancing" to keep future RMDs at manageable levels. To accomplish this goal, the major donor can give up to the maximum QCD amount in 2025 of $108,000 from his or her IRA. This has the advantage of "balancing" the estate assets.
In addition, there may be income tax benefits. If the donor were to take the IRA distribution into his or her own personal income, there are several types of exemptions that are phased out at higher income levels. Thus, it may be preferable to make the gift directly from an IRA rather than making a charitable gift from regular income.
Social Security Donor
Social Security is subject to two levels of taxation. For donors who have income in excess of the first level, 50% of Social Security is taxed. For donors with income in excess of the second level, up to 85% of Social Security income may be subject to tax.
Withdrawing any amount from an IRA will potentially cause the amount of the donor’s social security benefits that are taxable to increase from 50% to 85%. Even if the withdrawn amount is given to charity and then deducted, there may still be increased tax on the donor’s income. Thus, by making the transfer directly to charity, many Social Security recipients will save income taxes.
Standard Deduction Donor
Many seniors do not have a mortgage and have medical deductions that are less than 7.5% of AGI. Thus, they may not have a sufficient level of deductions to itemize and choose instead to use the standard deduction.
If a donor withdraws $1,000 from his or her IRA and then gives it to charity, there is $1,000 of increased income with no offsetting charitable deduction, since the standard deduction is taken. Therefore, it may be preferable for all donors who take a standard deduction to make IRA charitable rollover gifts directly to charity and avoid the additional income tax on their RMD.
Progress on Colossal Tax Bill
On April 10, 2025, the House of Representatives adopted a joint budget resolution with the Senate by a narrow vote of 216 to 214. While the House is recessed until April 28, there are intense discussions underway to prepare a tax bill.
The efforts to draft different provisions of the tax bill are extensive. It is expected that there will be hundreds of requests for scoring the bill’s suggested provisions. The Joint Committee on Taxation staff will be working overtime to respond to these scoring requests.
The key question is the amount of "budget space" available for the bill. House Ways and Means Committee Chair Jason Smith (R-MO) will need to make "hard choices" about both the tax cuts and the offsets or tax increases.
Within the House, there are many alliances that are being built to try to advance multiple different priorities. There will be numerous provisions in the colossal tax bill that will have major impact on specific groups.
There is a raft of proposals submitted to the House and Senate tax writers. Senator Josh Hawley (R-MO) advocates for an increase in the home mortgage interest deduction and child tax credit. Senator Chuck Grassley (R-IA) suggested the Senate may increase the top individual marginal rate. A letter from over ten House Republicans to the House Speaker stated they would not "support a final reconciliation bill that includes any reduction in Medicaid coverage for vulnerable populations." House Financial Services Committee Chair J. French Hill (R-AR) supports the tax-exempt status of municipal bonds.
There are thousands of lobbyists and organizations in Washington, D.C. Each organization is focused on a specific provision. The S Corporation Association has opposed the millionaire’s tax. The concern is that a millionaire’s tax would cause wealthy individuals to leave the country. The Urban Institute advocates expansion of the Low-Income Housing Credit. Other tax organizations advocate a reduction in the corporate tax rate to 15%.
There is an avalanche of ideas and advocacy that spans 21 committees. A tax bill this large will need to be reviewed and prepared by 11 House and 10 Senate committees which is a massive undertaking.
House leaders have stated they want to complete the work by Memorial Day. This is a very aggressive schedule for a tax bill of this size and scale.
Many of the advocates are issuing "lines in the sand" threats. With the very narrow House majority, there is clearly leverage for individual members. However, the "lines in the sand" posturing will be tested when the final votes occur.
While ideas such as raising the top marginal rate are opposed by a significant number of members of both the House and Senate, a final bill will necessarily involve tax reductions and offsets.
Editor's Note: With the sunset of many of the TCJA provisions at the end of 2025, there is likely to be a major tax bill this year. Your editor will attempt to cover the progress of this tax bill as a service to our readers.
Numbers Debate Over Tax Bill
As the House and Senate work with the Joint Committee on Taxation to score a thousand provisions in the new tax bill, it is helpful to understand the impact of these scoring estimates.
The Senate and the House have adopted a budget blueprint. However, the House and Senate each have different instructions for their tax writers on how to craft the major bill. The bills will have multiple tax reductions, but there must also be tax increases (offsets) and spending reductions.
The general goal for the House is $2 trillion in spending cuts. The U.S. Senate Committee on Finance has an allocation of $1.5 trillion for new tax proposals.
There are five major goals for the tax part of the bill. These include extending some of the Tax Cuts and Jobs Act provisions to lower individual tax rates, increase the larger standard deduction, expand the child tax credit, increase the estate tax exemption and provide a 20% pass-through deduction for small businesses.
However, extending these provisions will involve major costs. It may be difficult to comply with the reconciliation rules and create a permanent extension. House Ways and Means Chair Jason Smith (R-MO) indicates the current House provisions are likely to require extensions for a number of years.
In addition, there are a number of provisions that expired or are expiring soon under TCJA that "members would like to include.” These include research and development expensing, 100% bonus depreciation and increased interest deductions.
The White House has advocated for new tax cuts that will increase the cost of the bill. These cuts could include the elimination of taxes on tips, the reduction of tax on overtime and no tax on Social Security benefits. Finally, there is a group of House Members who support increasing the state and local tax (SALT) deduction. A proposed increase of the $10,000 limit to $25,000 was considered not high enough by this group of members.
Douglas Holtz-Eakin is the current president of the American Action Forum and he was previously Director of the Congressional Budget Office. He stated, "We can expect months of rosy reports of progress out of the House and the Senate. Meanwhile, they will be no closer to actually agreeing on what they are doing. That will only happen when the House and Senate confront one another with finished legislative products."
Editor's Note: The House and Senate have major differences regarding costs and offsets. It is simple to advocate tax reductions but difficult to pass tax increases and spending reductions. There will be challenging negotiations as the House and Senate tax writers finalize the bill. Given the importance of a bill to replace the sunsetting TCJA provisions at the end of 2025, it is highly likely there will be intense negotiations and a major tax bill passed this year.
Applicable Federal Rate of 5.0% for May: Rev. Rul. 2025-10; 2025-19 IRB 1 (16 April 2025)
The IRS has announced the Applicable Federal Rate (AFR) for May of 2025. The AFR under Sec. 7520 for the month of May is 5.0%. The rates for April of 5.0% or March of 5.4% 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 2025, pooled income funds in existence less than three tax years must use a 4.0% 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.”
