For a few more days this year, the tax law will allow you to give to charity directly from your IRA and count that gift toward your required minimum distribution. Giving to charity from your IRA will also provide you with additional tax savings. But, to qualify, you must make your donations before 2008.
Unlike the typical deduction you may be taking to offset your charitable giving, the Pension Protection Act of 2006 offers you tax savings opportunities which a charitable contribution deduction will not.
The Pension Protection Act provisions allow you to make so called “qualified charitable distributions” from your IRA and to exclude the gift from your gross income. Furthermore, such gifts can be used to fulfill required minimum distributions. But you must give before 2008, when the provision sunsets.
If you are an IRA account owner over 70 1/2, you are required to take withdrawals, known as “required minimum distributions” (RMDs), from your IRA account. You must take your RMD each year, regardless of whether you need the money or not. What’s more, IRA withdrawals must be reported as income and are taxed at ordinary income rates. After all, Uncle Sam won’t let your money go tax-free forever.
The Pension Protection Act offers a unique tax benefit with these so called, “qualified charitable distributions.” Here’s how: Gifts you make to charity from your IRA bypass your taxes altogether. Since your gift is not counted as income, it does not increase your adjusted gross income (AGI).
Your adjusted gross income determines your tax bracket and your eligibility for a number of other tax benefits. By reducing this number, you may avoid the phase-out rules which may limit your itemized deductions or personal exemption amounts. You may even be able to drop to a lower income tax bracket.
If your IRA contains both before-tax and after-tax dollars, you can save even more by giving. Qualified charitable distributions made from an IRA containing both before-tax and after-tax dollars are taken from the portion of untaxed dollars. This is a radical departure from the typical IRA model which requires you to withdraw the pre-tax and after-tax dollars proportionately. Under the Act, you’ll be able to give away the dollars which carry the highest tax liability. At the end of the day, you’ll have a higher percentage of after-tax dollars left in your IRA.
To be considered a “qualified charitable distribution,” your donations must meet a few criteria. First, only IRA account holders age 70 1/2 or older are eligible to participate.
Next, your donation must be made directly from your IRA to the charity. Contact your IRA trustee for more instructions on how to initiate the transfer. Any distribution made payable to you won’t qualify.
Finally, be sure the receiving organization is a qualified public charity or private foundation which can receive donations. Contributions to donor advised funds aren’t considered qualified charitable distributions. And, as with any gift to charity, don’t forget to obtain a receipt acknowledging your gift.
Qualified charitable distributions will help to fulfill your annual required minimum distributions. But, your donation can be greater than your required minimum distribution amount. You can exclude up to $100,000 in qualified charitable gifts each year. A gift amount over $100,000 must be recognized as income and deducted according to the standard charitable deduction rules.
Above all, keep in mind that you cannot double-dip and take a deduction for your IRA qualified charitable contribution. No deduction is permitted for charitable distributions which are not recognized as income.
Finally, be sure you act soon. Only contributions made to charity before January 1, 2008 can be characterized as qualified charitable distributions.
Qualified charitable distributions are just one tax planning tool which may save you money. We advise our clients to meet with their tax professional in November or December to review their tax plan before year’s end. Tax planning is complex and time consuming. So, make an appointment with your tax professional before the real tax season hits.
Qualified Charitable Contribution Gift Checklist:
- Verify that you are required to take RMDs.
- Make your contribution directly from your IRA to the charity.
- Confirm the receiving institution is a qualifying charity.
- Obtain a gift receipt.
- Give before January 1, 2008.
For more information about year-end tax planning, you are invited to attend the November NAPFA Consumer Education Foundation presentation. John G. Bowen, CPA, CFP, AIF, of Bowen Financial Services, LLC, will be speaking on year-end tax planning.
The seminar will be held on Saturday, November 10th, 2007 from 12:00pm to 1:30pm at the Northside Library in the Albemarle Square shopping center. For more information call (434) 244-0000, or send an email to or send an email to firstname.lastname@example.org. To learn more about the NAPFA Foundation visit http://www.napfafoundation.com/NAPFAfoundation_Charlottesville.htm.
All presentations are free and open to the public. You are encouraged to attend and to bring your financial questions.
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