Relief for Older Farmers with IRAs

The Tax Extenders bill made permanent the ability for older taxpayers to contribute up to $100,000 of their IRA holdings directly to a charity.  For many older farmers, this option can save them income taxes.  There are several situations where this may help a farmer.  We will review three of the options to see how much money it might save a typical farm couple.

Example #1:  Ted and June Jones are each age 72.  They receive $100,000 of cash rent for their farmland.  Ted was also required to take a minimum distribution (RMD) of $12,000 in 2015.  They do not itemize their deductions even though they give about $12,000 to their local church each year.  Their current total income taxes for 2015 (they live in Iowa) is about $20,900.  If they, instead contributed $12,000 from their IRA directly to the church, this reduces their overall tax liability to $16,800 or savings of $4,100 or a 20% reduction in tax.

Example #2:  Ted and June Jones only receive $30,000 from cash rent, but also receive about $25,000 of social security benefits.  The total tax on all of their income is about $4,200 including the $12,000 RMD.  If they contribute the IRA directly to their church, their tax liability drops to $1,200 or a savings of about $3,000 or a 71% reduction in tax.

Example #3: Ted and June Jones receive $250,000 of cash rent income during 2015.  With the $12,000 RMD, they are required to pay about $75,500 of federal and Iowa income tax.  By contributing the IRA directly to the church, their income tax liability drops to $70,200 or a reduction of $5,300 including eliminating the net investment income tax of about $500.

As you can see, even if you are in the lowest income tax bracket (example #2) or a high income tax bracket, in many situations, the ability to contribute your IRA directly to a charity can save you income taxes.  This option is available for those taxpayers age 70 1/2 or over and the maximum amount that you can contribute using this method is $100,000.

Paul Neiffer, CPA