As part of the Pension Protection Act of 2006, taxpayers age 70.5 and older can take tax-free distributions, up to $100,000 in 2006 and 2007, from traditional and Roth individual retirement accounts (IRAs) for charitable purposes. This provision is expected to increase charitable contributions from IRAs. Without this provision, donors typically find that the income tax deduction for the charitable contribution is not enough to offset the tax bill generated by the IRA distribution. With this provision, the income from the IRA is not included in gross income, and the charitable contribution cannot be deducted on the donor's tax return.
To qualify, the distribution must meet these conditions:
• The distribution must be made from an IRA. Distributions from 401(k) plans, SEPs, and SIMPLE plans do not qualify. However, rollovers from another retirement plan to an IRA can be used for this purpose.
• Charitable contributions must be made to public charities, such as churches, hospitals, museums, and educational organizations. Contributions cannot be made to private foundations, donor advised funds, supporting organizations, or split-interest entities.
• The IRA owner must be at least age 70.5.
• The distribution must be made directly to the charity. If the IRA owner takes the distribution and issues his/her own check to the charity, it will not qualify.
• The distribution must otherwise be fully deductible as a charitable contribution. Thus, the donor must not receive any benefit from the contribution or the entire distribution is disqualified from IRA charitable rollover treatment. The donor must obtain a written acknowledgement from the charity that no goods or services were received in return for the contribution.
• The distribution must otherwise be included in gross income. Thus, only the taxable portion of the IRA distribution qualifies. If a nontaxable distribution is taken from the IRA, the IRA owner would not have to include the distribution in income and could take a charitable contribution deduction. Qualified distributions from an IRA to charity are deemed to come first from the taxable portion of the IRA, leaving the maximum amount of tax-free dollars in the IRA.
The provision is expected to benefit taxpayers who do not want itemized deductions, who want to donate more than they can currently deduct as a charitable contribution, or who find that excluding the distribution from gross income will allow them to retain other tax benefits, such as allowing a higher percentage of their medical expenses to be deducted or subjecting less of their Social Security income to income taxes. Please call if you'd like to discuss this in more detail.