The recent financial bailout by the government extended certain popular tax breaks that otherwise were set to expire at the end of 2008. One of those extended tax breaks is the income tax-free distributions to charities directly from individual retirement accounts (“IRAs”).
So if you are thinking about making a charitable contribution in 2008 and/or 2009, consider using funds from your IRA.
Taxpayers age 70 1/2 or older can exclude up to $100,000 from gross income if the IRA withdrawal is paid directly to a qualified charity (excluding private foundations and charitable remainder trusts). This exclusion also applies to the taxpayer’s required minimum distribution which is the annual IRA payment that account owners are required to take once they have reached age 70 1/2. For example, the taxpayer can direct that the required minimum distribution for 2008 and/or 2009 (up to a maximum of $100,000 per year) be paid directly to a charity and the income will not be included in the taxpayer’s gross income.
Under normal circumstances, a taxpayer can only deduct up to 50% of adjusted gross income for charitable contributions made from the taxpayer’s regular assets in any given tax year. This deduction is taken on Schedule A of the income tax return as an itemized deduction. The deduction for additional contributions over the 50% limit are carried over to subsequent tax years for up to 5 years. However, gifts made directly from an IRA are “over and above” gifts and will be excluded from adjusted gross income.
Although the taxpayer does not get a charitable deduction on Schedule A for this contribution, it is a great tool to minimize gross income and to help a favorite charity. Below are a few examples of how a contribution from an IRA can be beneficial to a taxpayer:
- Contributions from an IRA can be used to accelerate an existing charitable pledge already made by the taxpayer.
- Contributions from an IRA can be used to balance the taxpayer’s assets in order to minimize future income tax problems. Instead of donating appreciated stock (which if sold is only taxed at 15%), a taxpayer can minimize income taxes by donating IRA funds which are taxed at ordinary income rates.
- Many senior taxpayers do not have a mortgage and their medical deductions may be less than 7.5% of their adjusted gross income. Therefore, they may not have a sufficient level of deductions to itemize. Charitable contributions are only tax deductible if the taxpayer itemizes. A contribution directly from an IRA is excluded from income in its entirety (up to $100,000 per year), and thus lowers taxable income on a dollar for dollar basis.
- Social security income is subject to two levels of taxation depending on the taxpayer’s gross income. An exclusion of IRA income from gross income may result in a lower tax on social security income.
In short, if you are planning on making charitable contributions for 2008 and/or 2009, consider using funds from your IRA. The $100,000 IRA charitable gift exclusion opens up many new gift opportunities and may give you other tax-related benefits not otherwise available.