As we approach the end of the year, many of us think in terms of two things: giving gifts and the end of the tax year. Here is something that bears thinking about that can have a positive impact on both topics.
On August 17, 2006, President George W. Bush signed into law the Pension Protection Act of 2006. This law includes a charitable giving provision that allows new tax-free distributions from IRA’s a provision know as the Charitable IRA Rollover. The law also imposes new restrictions on the deductibility of some other donations.
The charitable IRA rollover can be a very sensible option. It provides an exclusion from gross income for certain distributions of up to $100,000 from an individual retirement account (traditional or Roth), which would otherwise be taxed as income. To qualify, the gift must be made to a tax-exempt organization. A donor-advised fund does not qualify.
If you have saved tax-deferred income in an IRA and are required to take minimum distributions from that account(s) at age 70 ½, you will pay income tax on that amount. However, by making a charitable gift from you IRA in an amount equal to or more than the required minimum distribution for that year, you can accomplish your charitable goals and reduce your tax liability.
Here are the requirements:
- Your must be 70 ½ years of age
- Tax benefits apply to gifts up to $100,000 per year tax years 2006 and 2007
- The provision expires December 31, 2007.
- The amount must be in the form of an outright gift.
Here’s an example:
John Doe has several traditional IRA’s totaling $1.5 million. In May, he celebrated his 71st birthday. That means that, in 2006, his required minimum distribution from these accounts will be $54,745. Under the new law, John can transfer that amount to a qualified charity(ies) as a charitable gift to avoid being taxed on it.
Who benefits from a charitable IRA rollover?
Anyone who turned 69 years of age by July 2, 2006 is eligible to make a charitable rollover form IRAs before the provision expires on December 1, 2007. The charitable rollover may be particularly appealing if:
- You have already maxed out your charitable deductions. A qualified charitable distribution operates separately from the percentage rules that limit the tax benefit of individual charitable giving. For individuals included to give more, the charitable IRA rollover option is ideal.
- You do not itemize. Because qualified charitable distributions from IRAs do not require the donor to claim an income tax charitable deduction, non-itemizers can take the equivalent of a charitable deduction via the IRA rollover and indicate that on the front page of IRA form1040 without itemizing.
- You reside in a state that does not allow itemized charitable deductions. Most states follow the federal income inclusion rules, which means that donors in a state where the tax incentive for giving was limited by the old rules could realize an additional benefit.
After Aug. 17, 2006, donations of clothing or household items that aren't in "good used condition" or better won't be tax-deductible, so taxpayers might not experience the leniency that they have in the past.
An additional form must be filled out to claim a deduction for non-cash contributions that total more than $500. The IRS also may disallow deductions for items that have little or no monetary value.
For cash donations of $250 or more made during 2006, deductions are granted only with written acknowledgment from the qualified organization. For 2007, all cash contributions must be documented with a bank record, such as a cancelled check, or a written acknowledgment from the qualified organization.