For those wishing to make charitable donations from their IRA accounts, dealing with the resulting tax issues just got a lot easier. In August, Congress passed, and President Bush signed, the Pension Protection Act of 2006. Touted as the most significant overhaul of the pension system in the past 30 years, one provision of the law changes how charitable donations are taxed.
Previously, those wishing to make charitable donations using money in their IRA accounts were required to withdraw funds from their IRA and pay income tax on the withdrawal before they could take a charitable donation deduction on their annual tax returns. But under the new law, so long as the donation is transferred directly from an IRA or rollover IRA account to an eligible public charity, the donor doesn't have to pay any income tax on the withdrawal at all. As far as the federal government is concerned, money donated to the charity simply is not income. (But note that the transfer is no longer eligible for the charitable tax deduction, either.)
It remains to be seen, however, whether such withdrawals for charitable purposes will count toward an individual's minimum IRA distribution requirements for the year. If the qualifying donations do not count toward the distribution amounts, then donors will be required to withdraw more funds from their IRA accounts, and these funds will be subject to income tax. Unfortunately, the law is not clear on this issue.
Other requirements of the new charitable donation rule are clearer. They include:
- The donor must be 70 ½ years old.
- There is a $100,000 annual limit on donations.
- The donations may only be made from an IRA or rollover IRA account. Donations from other retirement accounts, such as a 401(k), do not qualify.
- The organization receiving the donation must be a qualifying public charity. Donations to private foundations, supporting organizations, trusts established for both charitable and non-charitable purposes, or other funds over which the donor may have some advisory control do not qualify.
- The transfer must be made directly from the IRA account to the qualifying organization. This is ordinarily done by instructing the brokerage firm holding the IRA to make the transfer. If the donor receives the funds from the IRA and then donates them to charity, they will be subject to the income tax.
IRA holders can take advantage of the charitable donations provision until it expires on December 31, 2007.
For more on the charitable donations provision of the Pension Protection Act of 2006, click here.
For Congress's "Technical Explanation" of the Act -- all 386 pages of it -- click here. Details about the bill's charitable provisions begin on page 263 (page 273 of the Adobe PDF document). (If you do not have the free PDF reader installed on your computer, download it here.)