Good news for some individual investors: The recently enacted Pension Protection Act of 2006 allows qualified taxpayers to make IRA distributions directly to a qualified charity without including the distribution in gross income or paying taxes on the withdrawal.
For many taxpayers, prior to this act, an IRA withdrawal and charitable contribution would directly offset each other, resulting in no tax impact. However, for taxpayers with income over certain thresholds, the IRA withdrawal would lead to a reduction in itemized deductions and personal exemptions, creating an increase in taxes. This change allows these taxpayers to avoid these reductions, thereby getting a true income offset for their donation.
This law permits up to $100,000 to be contributed directly from an IRA to charity for the 2007 tax year. Other conditions apply, including:
- The IRA account holder must be age 70½ or older.
- It must be a direct transfer from the IRA trustee to the charity. You cannot write a check and then be reimbursed by the IRA.
- Eligible organizations are public charities described in IRS Section 170(b)(1)(A), excluding donor advised funds and an organization described in Section 509(a)(3).
- The distribution will be eligible to the degree that it would have been included in gross income.
- The full amount would have otherwise been an allowable charitable contribution.
These distributions will also satisfy the Required Minimum Distribution (RMD) rules. Taxpayers who use their IRA to make charitable contributions can use those payments to also meet their RMD, avoiding those taxes as well.
This new provision in the law can be useful for those who are required to take money from their IRA, but don’t really have a need for it, and also are charitably inclined. Before you act, be sure to consult your financial advisor and your tax professional to determine whether this charitable giving strategy is right for you. iBi