Tax Tip of the Week – Donation Straight from Your IRA results in Extra Benefits

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Writing_check The following is an article from The Tax Strategist newsletter that does a very good job of explaining the advantages of donations straight from an IRA. Contact me if you think this is something that might help you.

Charitable-minded retirees have another chance to do a good tax deed with benefits. The 2010 Tax Relief Act retroactively reinstates the tax break for "charitable rollovers" to Jan. 1, 2010 and extends it through 2011. So you still have a short window of opportunity to take advantage of this unique technique.

How it works: If you're age 70 1/2 or older, you can exclude from tax “qualified charitable distributions” of up to $100,000 that would otherwise be taxable as IRA distributions. A qualified charitable distribution isn’t reported as taxable income or claimed as a charitable deduction. Similarly, the distribution won't increase your adjusted gross income (AGI) for other tax purposes.

Here's what you can accomplish tax-wise by making this move:

  • Deductions for charitable donations may also be restricted by other rules based on 30% and 50% of AGI. The IRA payout is exempt from these ceilings.
  • If a taxpayer is carrying over charitable deductions from the prior year, he or she may receive the full benefit of the deductions this year. Otherwise, the regular charitable limits are applied before the carryover is allowed.
  • The charitable distribution is never realized as taxable income. This can lower your AGI for the deduction floors for medical expenses and miscellaneous expenses.
  • An IRA withdrawal would normally result in taxable income that could increase tax on Social Security benefits. Using the charitable distribution technique avoids the problem.
  • The distribution counts toward required minimum distribution (RMD) amounts. Thus, if you take the exact amount of the RMD and transfer it to charity, you can leave the IRA intact for another year.
  • This tax provision might also benefit taxpayers who claim the standard deduction. It is the equivalent of taking a tax deduction as an itemizer.       

Note that the tax break for charitable distributions applies to Roth IRAs as well as traditional IRAs. Roth IRA distributions to individuals who are over age 59 ½ are usually tax-free. But a portion of a distribution may be taxable for a Roth in existence less than five years. Therefore, you're usually better off using a traditional IRA rather than a Roth for this purpose.