Then there are those rare times, like now, when charitable giving provides an additional reward to the charity-minded giver.
A new tax provision, set to expire after 2007, provides a federal tax benefit to qualifying taxpayers who make direct distributions to charity from their IRA accounts.
Under the new federal tax provision, anyone age 70 1/2 or older can make distributions from traditional and Roth IRA accounts directly to charity.
The direct distributions are free from federal income tax and are considered part of your minimum required IRA distributions for the year. They can also reduce your federal tax bill.
Under the prior tax rules, you had to actually withdraw the funds from your IRA account, then donate the cash to qualified public charities. On the tax side, you were required to include the taxable amount of the withdrawal as income on your IRS Form 1040 and hope for a tax benefit by claiming the donation as an itemized deduction.
The amount of benefit, if any, resulting from your charitable deduction depended on your adjusted gross income and whether or not you itemized.
The new tax rules simplify the transaction and can provide a significant tax benefit. But they end this tax year unless Congress acts — they were only enacted for 2006 and 2007. There are also a number of restrictions, including the following:
You can’t donate more than $100,000 from your IRA account in any tax year and there is no carryover. That means you can’t have donated $200,000 in 2006 and carry over the excess donation to your 2007 tax return.
Your IRA distributions contributed to charity won’t qualify for a charitable deduction on your tax return.
However, the new tax-free treatment provides essentially the same tax benefit as a 100 percent write-off — without requiring that you itemize deductions and without affecting other tax limitations based on adjusted gross income, such as the phase-out for itemized deductions
The provision does not apply to distributions from SEP IRAs, SIMPLE plans or qualified retirement plans.
Not all charities are qualified recipients. Generally, the qualified charities are those referred to as “50% charities,” but not supporting organizations or donor-advised funds.
There are other tax rules you must follow to ensure that your IRA distributions to charity qualify for this beneficial treatment, so be sure to consult with us or your tax professional.