If you have an individual retirement account (IRA) and have reached age 70-1/2, the Tax Relief Act passed in December 2010 provides you with a tax-advantaged way to support a favorite charity. A tax incentive that previously expired at the end of 2009 is now extended through the end of 2011.
In general terms, an IRA owner who is at least 70-1/2-years-old may transfer up to $100,000 per year by direct gift from his or her IRA to a qualifying charity. The benefit is that this direct gift will not be included in the donor’s income for tax purposes, but will count toward satisfying his or her minimum required distribution (the amount that must be withdrawn from one’s IRA each year to avoid penalty).
Direct Transfers: More Advantageous Than Withdrawls
The direct gift offers significant tax advantages over withdrawing funds from one’s IRA and donating them to charity. Some taxpayers use the standard deduction and do not itemize. Some taxpayers who itemize receive only limited tax benefits from their itemized deductions, such as those subject to the alternative minimum tax (AMT). Others find that an increase in adjusted gross income (AGI) will increase the tax on their social security income, and reduce their ability to deduct medical expenses and other itemized deductions. (Some deductions are allowed only to the extent they exceed a percentage of AGI, so a higher AGI means a lower deduction.) The direct gift provision avoids this “slippage” which is ordinarily a deterrent to using IRA withdrawals to make gifts to charity.
No tax deduction is allowed for a direct gift to charity, but this is logical because the donor’s income is not increased by the payment. It is a benefit to be able to direct money to a beneficiary of your choice without first taking it into income.
As with all tax incentives, there are restrictions:
- The donor must be at least 70-1/2- years-old on or before the date of the direct gift.
- Generally, a direct gift must come from a traditional IRA – it may not be made from a qualified retirement plan or a 403(b) plan. The direct gift must consist of funds that would otherwise be includible in income, so it may not come from a Roth IRA except in some unusual circumstances.
- Direct gifts are limited to $100,000 per donor per year. If a husband and wife have separate IRA accounts, the limit applies separately to each of them (i.e., each spouse may give up to $100,000 per year).
- The direct gift must be one that would qualify as a charitable deduction if made under the usual tax rules. This means it can’t be used to buy a table at a fund-raising event, or to pay for items at a charity auction, since neither of those payments is fully deductible. Also, the donor must obtain sufficient substantiation to permit the gift to qualify as deductible under the usual rules.
- Generally, only certain publicly-supported charities qualify to receive direct gifts. Direct gifts may not be made to donor-advised funds, most private foundations, or supporting organizations.
- The correct procedure must be followed. The payment must be made by the IRA trustee directly to the charity.
If your state imposes an income tax, check to see whether a direct gift will be excluded from your income for state income tax purposes as well. Many states define “income” on the basis of federal adjusted gross income, and if so, a direct gift to charity is most likely excluded from income for state law purposes.
This provision helps IRA owners who meet the age requirement and it also gives a boost to charities at a time when most are in need of additional resources.