Benefits of direct giving from an IRA

[Roland Slugg]

As many of you know, Section 1201 of the Pension Protection Act of 2006 (H.R. 4) authorizes taxpayers who are at least age 70½ to make direct charitable contributions from their IRAs. This opportunity offers many potential tax benefits to those who elect to do it. By doing what it allows, a taxpayer can benefit in one or more of the following ways:

• Receive tax-free income if his charitable contribution would otherwise be lost because he does not itemize.
• Avoid receiving income that would result in the taxation of 50%/85% more of his social security benefits.
• Lower his AGI, increasing his net medical and miscellaneous itemized deductions.
• Lower his AGI, reducing the loss of itemized deductions due to the phase out.
• Lower his AGI, reducing the loss of personal exemptions due to their phase out.
• Lower his AGI, reducing the loss of various other deductions and/or credits due to their phase outs.
• Bypass the 50% deduction limit on charitable contributions.

There are probably other potential benefits of this, and I can scarcely think of any downside losses.

This is not some "loophole" for only the rich, either. Many "ordinary" retirees will benefit in one or both of the first two ways in the above list. This is such a nice little benefit for people who qualify that it would behoove them to make all their charitable contributions via this method ... within reason of course.

Those who send out regular tax tip newsletters to their clients may wish to include this in an upcoming issue. Others may wish to write a separate letter about this matter alone and mail it to all their clients who qualify to use it.

Once this new provision becomes more widely known by taxpayers as a whole, its use may become so widespread that IRA trustees will start imposing fees for such transfers, in part to recover the nuisance cost of complying and in part to inhibit its use for small (under $100...$250...$500?) or frequent contributions.

[jimmcg]

Agree, I have a few clients who receive sizable minimum required distributions and are not able to itemize their deductions. They also have a large portion of their social security benefits subject to taxation as a result of their income levels. This will benefit them greatly. I am communicating with them now while they can still do something about it.

[Jan]

I read all of these ideas in my newsletters, but I don’t have many clients that could afford to give their RMD to charity and loss about 78% of there spend able money to live on.
I suppose if the person is extremely wealthy and could afford to give his money to charity, more power to him.
Most of my clients aren’t that will to do and usually just give very little.

Once this new provision becomes more widely known by taxpayers as a whole, its use may become so widespread that IRA trustees will start imposing fees for such transfers, in part to recover the nuisance cost of complying and in part to inhibit its use for small (under $100...$250...$500?) or frequent contributions.

__________________

This transfer from your IRA to Charity is only for tax year 2006 and 2007; most taxpayers probably already missed 2006.

[Joe Btfsplk]

I don’t have many clients that could afford to give their RMD to charity and loss about 78% of there spend able
.

The direct IRA transfer contribution cannot be used to meet the RMD.. The untaxed contribution would have to be over and above the RMD. (See the updates to The Tax Book)

[Joe Btfsplk]

Those who send out regular tax tip newsletters to their clients may wish to include this in an upcoming issue. Others may wish to write a separate letter about this matter alone and mail it to all their clients who qualify to use it.

.

Be careful if you tell your clients of all these possible benefits. Many will assume that it can be part of their RMD. Others will assume that they can do this and also deduct the contribution on Schedule A.

[Jan]

The direct IRA transfer contribution cannot be used to meet the RMD.. The untaxed contribution would have to be over and above the RMD. (See the updates to The Tax Book)

If you are currently required to take minimum distributions from your IRA because you are over 70 ½, you may contribute your required distribution directly to a charity and exclude it from your taxable income. Charitable distributions that are excluded from gross income may not be taken as a charitable deduction on Schedule A.

Is this not correct?

[fliszt]

Rowland,

Thank you very much for taking time to post this information. I'm sure it will benefit some of our clients.
Larry M.

[fliszt]

Jan,

you are correct. If client has IRA trustee send a donation directly to a listed charity organization from his RMD, it can not be used again on Schedule A.
Larry M

[Unregistered]

Rmd

It does apply to RMD. Problem is there have been no regulations issued yet for how the taxpayer will make the election. Vanguard, and I suppose others, send the check directly to the owner of the IRA and then in turn that person mails it to the charitable organization. In addition, there is no code in the new 1099R instructions for this so Vanguard codes it with number 7 - a normal distribution which will be taxable to the owner of the IRA. Vanguard advised me that is how the IRS instructed them to code it as they will issue regs. later for the taxpayer.

[Bees Knees]

The direct IRA transfer contribution cannot be used to meet the RMD.. The untaxed contribution would have to be over and above the RMD. (See the updates to The Tax Book)

TheTaxBook updates says: "Qualified charitable distributions from traditional IRAs are taken into account for purposes of the minimum distribution rules applicable to traditional IRAs."

That is the whole purpose for only allowing this provision for taxpayers who have reached at 70 1/2 - so that they can take their RMD and give it to charity to avoid tax without having to itemize deductions.