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Estate Planning Vault
Charitable Contributions of IRA During Lifetime
For tax years 2006 and 2007 only, a taxpayer who is at least 70 ½ years old can contribute to charity up to $100,000 per year from one or more Individual Retirement Accounts (IRAs).
Planning Tip: Distributions from a qualified plan do not qualify because they are not distributions from an IRA.
With contributions made by direct transfer from the IRA custodian to a “public” charity, the IRA owner need not report the distribution as taxable income.
Planning Tip: Unlike a typical IRA distribution, the distribution will not appear as taxable income on your income tax return. Because the distribution does not appear as income, however, you do not receive an offsetting charitable income tax deduction to reduce the income created by the IRA distribution.
Planning Tip: Public charities include religious organization, schools, etc. Unfortunately, Donor Advised Funds, Supporting Organizations and Charitable Remainder Trusts are not public charities, and therefore distributions to these types of charities do not qualify. These are just a few traps in the new law. Therefore, it is critical that you work with an advisor or team of advisors that understand the new law.
Significantly, charitable contributions that meet these requirements satisfy the required minimum distributions for the year of distribution; in other words, the distributions the government makes you take from your IRAs once you reach 70 ½.
Planning Tip: Consider life insurance to replace the wealth contributed to charity. If owned by and payable to a wealth replacement trust, the death proceeds will be income and estate tax free, as well as protected from creditors, divorce and spendthrift beneficiaries.
Are You Impacted by This Change?
There are two critical questions: (1) Do you have IRAs from which you can make direct contributions to charity, or alternatively, can you roll out of a qualified plan into an IRA?; and (2) Are you currently making or contemplating charitable gifts? If so, you may benefit from this new law, particularly if one or more of the following applies to you.
- You Claim the Standard Federal Income Tax Deduction
For those who do not itemize, this new law provides the equivalent of an unlimited federal charitable income tax deduction for up to $100,000 of the charitable gifts that they make from an IRA.
- You Would Otherwise Lose Phased-Out Deductions with Increased Income
Under the new law, a direct contribution of an IRA up to $100,000 does not increase the taxpayer’s Adjustable Gross Income (AGI). Correspondingly, it does not impact other deductions.
- You Are Subject to the 50% Limitation on AGI
A direct contribution to charity of up to $100,000 is not subject to the typical 505 of AGI cap for cash contributions to a public charity.
- Your State of Residency Does Not Permit State Income Tax Charitable Deductions
For clients in Indiana, Michigan, New Jersey, Ohio and Massachusetts, direct contributions from IRAs will result in the highest possible net tax savings.
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