Tax-Free IRA to Charity Distributions Reinstated

The provision that permits taxpayers age 70½ and over to make direct distributions (up to $100,000) from their IRA account to a charity has been reinstated for 2008 and 2009.  The distribution is tax-free, but there is no charitable deduction.  This provision can be very beneficial to taxpayers who have social security income and/or do not itemize their deductions.

IMPORTANT! If you are over 70½, you must act quickly to take advantage of this provision for 2008.  This provision can substantially benefit low-income taxpayers, as well as the more wealthy individuals.  Please call if you are contemplating a cash charitable contribution between now and the end of the year to see if it would benefit you to make a direct contribution from your IRA.

The key benefits of this provision lie in the fact that the distribution;

(1) Is not included in the taxpayer’s income for the year,

(2) Counts toward the taxpayer’s minimum required distribution for the year, and

(3) Does count as a charitable contribution for the year. 

How does a taxpayer benefit from this provision?

• By making a contribution directly from the IRA, taxpayers are able to exclude the amount that was contributed from their income for the year, which is essentially the same as deducting the contribution without itemizing their deductions.
• This technique also lowers a taxpayer’s adjusted gross income (AGI) for other tax breaks pegged at various AGI levels, such as medical expenses, passive losses, etc., allowing them greater benefits from the AGI limited deductions.
• For taxpayers receiving Social Security (SS), the taxability of the SS is also based on income.  Thus, excluding the portion of the IRA distribution directly distributed to the charity can reduce the taxable portion of the SS.
• Taxpayers who wish to make very large contributions (up to the 100,000 limit) can do so with IRA funds that would have otherwise been taxable to them.

Example: Retired couple (both over 70½) file a joint return.  Their income consists primarily of RMD from their IRA accounts totaling $35,500, both of their SS incomes totaling $28,000, and $2,000 of investment income.  They are very active with their church and make a $14,000 contribution each year. They have no other income or deductions.  Compare the 2006 results with and without a qualified charitable distribution:

 

In this example, instead of making a charitable contribution, the taxpayer made a qualified charitable distribution of $14,000, lowering their AGI, reducing their taxable SS, and then using the standard deduction.  Result: Tax savings of $2,901. 

Caution – It is important to stress that a qualified charitable IRA contribution must be directly distributed to the qualified charity. Otherwise, the distribution is taxable as income and the charitable deduction would be taken on the taxpayer’s itemized deductions subject to all the normal limitations.  Please call this office before attempting to execute this strategy.

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