By Catherine Gordon, Toolkit Staff Writer
Tax season is not typically associated with charitable giving. We may be giving, but it's the time of year where most of us are trying to hold on to as much of our money as we can.
However, if your taxable income includes a mandatory distribution from a retirement plan and you're in the enviable position of finding that you don't need the income, a charitable donation under a special provision may help you avoid a bigger tax bill.
A provision enacted by the Pension Protection Act of 2006 allows taxpayers to avoid paying tax on certain mandatory distributions from individual retirement accounts (IRAs) by directly donating the distribution to charity. Basically, under this new provision, individuals age 70 1/2 or older can distribute up to $100,000 of their IRA balance to certain charitable organizations in 2006 and in 2007 without recognizing income.
This provision might be for you if you do not need to take a distribution from your IRA to supplement your income, but are doing so only because of the rules requiring minimum distributions from an IRA after the owner reaches age 70 1/2.
This provision is only in effect for distributions made for 2006 and 2007. Therefore, it's important that you take advantage of it while you can.
While the premise behind this provision is simple enough, specific rules must be followed. The distribution can only be made on or after the date the person for whose benefit the plan is maintained reaches age 70 1/2. The distribution is considered a qualified charitable distribution only to the extent that the IRA distribution would be includible in gross income if not for the charitable donation being made.
In addition, the charitable distribution must be made from an individual retirement plan other than a Simplified Employee Pension plan (SEP), or a Simple Retirement Account, directly to a charitable organization described in the Internal Revenue Code. The types of charities eligible are limited. For example, donor-advised funds and supporting organizations are not eligible charities for purposes of this provision. You cannot receive anything in return for your charitable donation, for example theater tickets or a dinner.
Please note that it's crucial that the distribution is made directly to the charity. If you receive the distribution and turn around and donate the distribution, you will not be able to take advantage of this provision.
What if your mandatory distribution is coming out of a retirement account other than an IRA? You may be able to rollover the amount from the other retirement account to an IRA and then contribute the mandatory distribution to charity directly from the IRA. Again, unless the distribution is made directly from an eligible IRA to the qualifying charity, this provision does not apply.
Remember, you cannot take a charitable deduction for the amount you donated. That's because you would be getting a double benefit if you could do so: You wouldn't be taxed on a required distribution and you would have a deduction from income for the amount donated.
This brings up another important facet of this provision. Those who are in the best financial position to give to charity sometimes become ineligible for a charitable contribution deduction because of the income limitations, such as the adjusted gross income phase-out limitations, placed on this deduction. This legislation allows taxpayers to circumvent the income limitations.
As with any retirement planning, tax avoidance should never be the only purpose of any steps a taxpayer takes. The most important thing for anyone considering making this kind of a donation is the possible effect on financial security, both present and future.
If you determine that donating a mandatory retirement distribution to charity is the right move for you, this tax season, it truly will be better to give rather than to receive.
- Related items:
- New Pension Law Allows Tax Return-Funded IRAs
- New Pension Law Expands Investment Advice Options
- Congress Passes Comprehensive Pension Reform Bill
- Introducing the New Roth 401(k) Retirement Plan
- Estate Tax/Minimum Wage Bill Falls in Senate; Pension Legislation Approved
Added to the news on March 26, 2007.
|
