Vol 7 No. 18 - January 24, 2007

Donating IRA funds to charitable organizations

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distributions of pre-tax contributions and earnings from a traditional IRA are going to pay income tax on the amount withdrawn as ordinary income.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 donation.

However, there are some situations in which particular donors might find themselves limited in their ability to deduct the donation. Specifically:

• Donors who don’t 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 don’t 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 donor’s 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 won’t 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 couple’s 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 don’t 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 don’t 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.

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