Making charitable gifts got a little easier this year. Well, for seniors anyway.
On August 17, 2006, President Bush signed what was dubbed the Pension Protection Act of 2006. Among other things, the Act finally allows taxpayers the option of making a charitable gift directly from retirement assets without incurring an income tax liability.
The old law used to work like this: Bob is 75 years old and he wants to give $5,000 to Red Cross. In years past, he would have withdrawn the $5,000 from his IRA, reported that $5,000 as taxable income, paid the tax for the withdrawal and then taken a charitable deduction for the gift to Red Cross.
The new law works like this: Bob is 75 years old and he wants to give $5,000 to Red Cross. He calls his broker and asks that they rollover $5,000 directly to Red Cross. He does not report the $5,000 as taxable income and he does not take a charitable deduction for the gift.
Sounds good, right?
There are some caveats:
- You must be 70 years old or more.
- Qualified charitable transfers must come only from IRAs and not any other retirement assets such as 401(k), 403(b), or a SEP-IRA. You may be able to establish an IRA and then make a rollover to the IRA, from which you can make qualified charitable gifts.
- Your total gifts must be $100,000 or less each year.
- You must make the gift on or before December 31, 2007 – the new rule doesn’t apply after that date (oh c’mon, it’s Congress, you didn’t expect that it would stick around, did you?)
- Only public charities are eligible recipients. Supporting organizations or donor-advised funds do not count.
- The distribution must be made directly from the Trustee of an IRA to the charity.
I know what you’re thinking… It sounds like a wash. Well, actually no. The new scheme will actually benefit some older taxpayers, including those who are required to take minimum withdrawals (often called RMDs) but don’t need the additional income or who have a majority of their income in retirement assets. It also benefits those taxpayers who would normally lose the deduction because they either don’t itemize or are subject to phase-outs or caps based on income limitations.
So, the bottom line is that it’s a good option for older taxpayers who wish to make charitable gifts during lifetime, rather than at death, so long as you meet the criteria. If you’re not sure that you do, ask your tax professional.
To find out whether an organization is registered as a public charity, you can search the IRS charitable database.
