By Tom Breiter
sun staff contributer
The Pension Protection Act of 2006 contained provisions
regarding the owner of an IRAs ability to make donations
direct from the IRA to a qualifying non-profit organization
once they are over the age of 70 1/2. There is a limitation
of $100,000 for these direct donations, and the law is
set to expire at the end of 2007.
At first glance, this did not appear to be a big deal.
Obviously, those taking distributions of pre-tax contributions
and earnings from a traditional IRA are going to pay income
tax on the amount withdrawn as ordinary income. If the
person taking the distribution then decided to donate
part or all of the IRA distribution to a charitable organization,
he would receive an offsetting tax deduction, essentially
eliminating the tax impact of the IRA distribution, at
least to the extent of the dollar amount of the charitable
However, there are some situations in which particular
donors might find themselves limited in their ability
to deduct the donation. Specifically:
Donors who dont itemize their deductions
on Schedule A of Form 1040.
Charitable contributions are only deductible for those
who itemize deductions such as medical expenses, property
taxes, mortgage interest and un-reimbursed job related
expenses along with any charitable donations.
Individuals who dont have enough of these expenses
to justify itemizing use a standard deduction amount provided
by the IRS, which varies with their tax-filing status
(married, single, head of household).
In this case, the individual taking a required minimum
distribution, as required once age 70 1/2 is reached,
would be forced to pay income tax on the distribution,
but perhaps not qualify for an offsetting deduction. The
ability to make the charitable donation direct from the
IRA avoids the tax impact on the individual and allows
hito support his charity of choice more effectively.
Donors making large donations that may be limited
by IRS regulations.
Donors who are capable and generous enough to be inclined
to make large donations may find a portion of their tax
deduction disallowed by one of two IRS rules.
The first of these is easy to understand. The deduction
for charitable contributions is normally limited to 50
percent of the donors adjusted grow income for a
particular tax year. Some retirees who are forced to take
IRA distributions may have a high level of assets, but
may not have a high level of taxable income.
In these cases, the ability to donate up to $100,000 of
IRA assets directly to the charity may allow them to contribute
more than they might otherwise with no adverse tax impact.
The second potential reduction in deductibility of charitable
donations relates to a lesser know rule that impacts donors
who have very high levels of income. I wont go into
the exact formula here, but effectively, the percentage
of allowable itemized deduction, and by extension, charitable
contributions which can be deducted, goes down proportionally
with the amount a couples adjusted gross income
surpasses $150,500. Individual filers or those married
people filing separate returns have a different level
of income before the reduction in deductibility takes
place. You can still make all the contributions you wish,
but your ability to deduct them may be limited.
I would have to say that for the average person, these
rules emanating from the Pension Protection Act of 2006
probably dont have a lot of impact. For those in
more unique asset and income situations, there may be
some great benefits available for you as a donor and your
favorite charity as a beneficiary of your generosity.
As a side note, I would add that for those residing here
in Anna Maria Island and northwest Bradenton, the Anna
Maria Island Community Center would be a great choice
for a contribution, whether it is from your IRA or from
some other source. The Center is working hard to provide
a fantastic new facility to serve our local community,
and it is largely being accomplished with donations from
generous individuals and several foundations.
Donations to the Center are tax deductible to the fullest
extent of the IRS Code and your personal situation. Even
better, the Center has always ranked highly in terms of
the amount of donated funds which end up in programs and
dont get eaten up by administrative costs. About
85 percent reaches the programs where the end users benefit.
Tom Breiter is president of Breiter Capital Management,
Inc., an Anna Maria based investment advisor. He can be
reached at 778-1900. Some of the investment concepts highlighted
in this column may carry the risk of loss of principal,
and investors should determine appropriateness for their
personal situation before investing.