Qualified Charitable Distributions from IRAs

An interesting provision of the Pension Protection Act of 2006, signed into law on August 17, 2006, provides an important tax planning opportunity for certain individuals.

Individuals over age 70 ½ can make annual tax free distributions in each of 2006 and 2007 of up to $100,000 from their IRAs directly to one or more qualified public charities. If you are interested in making current charitable contributions, you may prefer to use your IRA accounts as a source of funds to make current charitable contributions so that the normally taxable distributions from your IRAs can be made tax-free and these distributions can count toward your IRA required minimum distribution for the year.

If you intend to make a significant charitable gift this year (2006) or next (2007), you should consider making the donation directly from your IRA rather than donating personally. The benefits of an IRA direct donation are as follows:

  1. The donated amount counts as part of your required minimum distribution but does not have to be reported by you as income. Therefore, the amount does not affect the taxability of your Social Security benefits, does not reduce the benefit of your itemized deductions, and does not increase your tax base for alternative minimum tax purposes.
  2. The donated amount is not subject to the normal limitation on the deductibility of charitable contributions, which is fifty percent (50%) of your adjusted gross income. Many clients making large charitable gifts do not fully benefit from the tax deduction because of this fifty percent (50%) of AGI limitation.

There are some limits on an IRA direct donation such as:

  1. The donation must be directly from your IRA custodian to the charity. Therefore, you cannot withdraw the funds from the IRA and then donate the funds and receive the favorable tax treatment described above;

  2. The donation can only be made to public charities, not to your own private foundation and not to a donor advised fund; and
  3. No IRA direct gifts are allowed to Charitable Remainder Trusts, Charitable Lead Trusts, Charitable Gift Annuities, or Pooled Income Funds.