Your Estate Matters
New law makes it easier to donate through your IRA
ON Aug. 17, President Bush signed the Pension Protection Act into law. This legislation will result in major changes to the private pension system in the United States. Many people will be on their own in saving for retirement.
Even before this law was passed, there had been many articles in newspaper and magazines raising public awareness of the need to save for retirement.
Let's look at a section of this law that does not have much to do with protecting pensions but is a nice benefit to older, charitably inclined Americans.
If you are 70 or older, you can now give up to $100,000 per year to qualified charities directly from your IRAs, excluding SIMPLE IRAs and SEP IRAs. This is a great opportunity for anyone 70 years old or older who has IRAs and makes charitable gifts.
If you are in this age group, you must take required minimum distributions (RMD) from your IRA. (The exception is a Roth IRA where the RMD rules do not apply to the IRA's owner.) For those of you who are taking RMDs and making charitable gifts, you can have the RMD or part of the RMD paid directly to your favorite charity or charities. If you do this, you do not have to pay any income tax on the RMD paid to the charity.
In most cases the tax benefit of not having to declare the taxable income is much greater than the tax benefit you would receive from a charitable itemized deduction. If you do not itemize your deductions, then you are getting no tax benefit from your charitable contributions and the direct gift to the charity will reduce your taxable income by the amount of the mandatory distribution that was paid to charity.
Even if you do itemize, most of the time it is still better to reduce your income than to take an itemized deduction. If you want to take advantage of this provision, you have only 2006 and 2007 to do so, since this provision expires after 2007.
This sounds really good, doesn't it? However, accomplishing the gifting so that you do not have to recognize the income is a bit complicated. First, the gift must go to a tax-exempt charity, excluding certain private foundations or donor advised funds. Second, the gift must be made directly to the charity. Third, the charity must provide the donor with substantiation that the gift was made, and the donor must have this substantiation when income tax returns are filed.
How you make a direct transfer of funds to the charity may vary among IRA custodians.
It would be nice if an IRA custodian would be willing to provide a checkbook for the owner of the IRA so the owner could write checks for various charitable contributions. A check written from your personal or regular checking account, even if it is exactly the same amount as the corresponding deposit of a distribution from the IRA into the regular checking account, will not qualify as a direct transfer to the charity.
Also, it is not clear yet how the custodian of the IRA will report the distribution from the IRA to the IRS.
The Pension Protection Act presents a helpful, though not exactly easy, opportunity to take advantage of the new law.
If you are interested in charitable gifting from your IRA, be sure to consult you tax advisor to find out how you can successfully make your gifts and get the best tax benefit.