Tax-Free Direct Gifts to Charities
Recent legislation offers a new charitable giving opportunity under the Pension Protection Act of 2006. If you are age 70 1/2 or older, own an IRA, and regularly make charitable contributions this opportunity may be suitable for you.
Pension Protection Act of 2006
The recent Pension Protection Act of 2006 allows you to make distributions directly from your IRA to one or more charities without the distributions being included in taxable income or subject to withholding. These charitable distributions are not considered taxable income; however, they are also not deductible.
Previously, if you wanted to use IRA funds for a charitable contribution, you had to withdraw money from your IRA and then contribute it. The amount you withdrew was taxable, and the deduction for the contribution may or may not have offset the tax.
Meeting Requirements
Another benefit of the new legislation is that the funds transferred from your IRA to a charity count towards your mandatory withdrawal.
Example: Suppose Mary has $700,000 in an IRA and will be required to withdraw approximately $35,000 this year, and suppose further that Mary wants to contribute $10,000 to a particular charity. She can authorize the trustee of the IRA to transfer $10,000 to the charity and $25,000 to her. The $10,000 distributed to charity will not be subject to tax.
Is This Opportunity Right For Me?
Making charitable contributions from an IRA rather than other assets will be especially appropriate for those who:
- do not itemize deductions,
- would not be able to deduct all of their charitable contributions because of deduction limitations,
- may lose some of their itemized deductions because of their income level, or
- are required to take distributions but do not need them for living expenses.
Limitations of the Pension Protection Act
Certain limitations apply to these non-taxable charitable distributions from an IRA:
- They cannot exceed $100,000 per year.
- They must be made to a public charity (not a private foundation), and they cannot be to a supporting organization or a donor advised fund.
- The gifts must be outright. For instance, they cannot be used to establish a gift annuity or fund a charitable remainder trust.
- These tax-free direct distributions can be made only in 2006 and 2007.
If you would like more information about a charitable contribution from an IRA, please contact us at plannedgiving@aarp.org or call the AARP Foundation Office of Planned Giving toll-free at 1-800-775-6776.
