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IRA Charitable Contribution

 Donate To Charity
 Directly Out Of Your IRA
 For Income And Estate Tax Savings

If you've reached age 70 1/2, there's a new tax saving opportunity you might be interested in if you have philanthropic inclinations: The Pension Protection Act of 2006 now permits you to make cash donations to many tax-exempt charities directly out of your traditional or Roth

How the Old Rules Worked

    Before the Pension Protection Act, an individual who wanted to donate money out of an IRA had to take a withdrawal from the account, include the taxable withdrawal amount in gross income, donate the cash to charity, and then claim an itemized charitable deduction on Schedule A of Form 1040.
    Unfortunately, the itemized deduction phaseout rule and the 50 percent-of-adjusted-gross-income (AGI) limitation often caused the allowable write-off for the donation to be
less than the income triggered by the IRA withdrawal. In addition, the income from the withdrawal could cause you to lose out on other tax breaks based on AGI.
   These unfavorable old rules will kick back in after 2007, unless Congress extends the charitable distribution provision.
Meanwhile, the strategy described in this article allows you to avoid the old rules for this year and next, subject to the $100,000 limitation for each year.


This favorable new qualified charitable distribution rule is only available for IRA payouts during 2006 and 2007. No more than $100,000 can be donated under the new rule in either of those years.

If you make a “qualified charitable distribution” to a charity directly from your IRA, the amount is federal-income-tax-free to you, but you get no itemized charitable write-off on your Form 1040. That’s okay, because tax-free treatment of the distribution equates to an immediate 100 percent deduction, without having to worry about tax-law restrictions that can reduce or delay itemized write-offs. As you will see by reading this article, the new rule offers some other important tax-saving advantages as well.

“Qualified charitable distribution” means the payment of an otherwise taxable amount by a traditional or Roth IRA trustee directly to a qualified public charity.

Here are five income and estate tax advantages of this strategy:


Qualified charitable distributions are not included in your adjusted gross income (AGI). This lowers the odds that you’ll be affected by various unfavorable AGI-based phaseout rules — such as the rules that can cause you to lose out on your itemized deductions (including those for charitable donations), passive losses from rental real estate activities, personal exemption write-offs, and so forth.


You don’t have to worry about the 50 percent-of-AGI limitation that can delay your itemized deductions for cash donations to public charities.


A qualified charitable distribution from a traditional IRA counts as a payout for purposes of the required minimum distribution rules. Therefore, you can arrange to donate all or part of your 2006 and 2007 required minimum distribution amounts (up to the $100,000 annual limit) that you would otherwise be forced to receive and pay income taxes on.


If you own one or more traditional IRAs that you’ve made nondeductible contributions to, part of your IRA balances are taxable amounts (from your deductible contributions and account earnings) and part are nontaxable amounts (from your nondeductible contributions). In this situation, qualified charitable distributions are treated as coming from the taxable amounts first. This is contrary to the “normal” rule that says IRA distributions are treated as being partly taxable amounts and partly nontaxable returns of your nondeductible contributions. Being allowed to pull out taxable amounts first for qualified charitable distributions works to your advantage. Reason: It allows you to completely avoid taxes on otherwise taxable amounts that are distributed from your IRA to charity, while leaving nontaxable amounts in your account that you can withdraw tax-free later on.


Last but not least, qualified charitable distributions will reduce your taxable estate.

If you’re interested in taking advantage of this strategy for 2006, you need to plan with your tax adviser to arrange for the money to be paid out from your IRA trustee to qualifying charities by the end of the year.

Bottom Line: The new qualified charitable distribution rule is beneficial for taxpayers age 70 1/2 or older in the following circumstances:

  • You don’t itemize. (Under the normal rules, only itemizers get a tax benefit for charitable donations.)
  • Your itemized charitable donations would be reduced by the itemized deduction phase-out rule or delayed by the 50 percent-of-AGI limitation.
  • You want to avoid being taxed on required minimum distributions that you are forced to take from your IRA.
  • You’re looking for a quick and easy estate tax reduction strategy.

Mind These Caveats

Federal-income-tax-free qualified charitable distribution treatment only applies when the entire amount distributed from your IRA would otherwise be fully deductible under the “normal” rules for itemized charitable donations (ignoring the itemized deduction phaseout rule and the 50 percent-of-AGI limitation). Therefore, if you receive any benefit from a charity that would reduce your deduction under the “normal” rules, you’ll lose the desired tax-free treatment for your IRA distribution. So be careful to avoid this problem.

Also, you cannot take advantage of the qualified charitable distribution rule for payouts from a SEP, SIMPLE IRA, or any other tax-favored retirement plan account.

Finally, the idea of taking qualified charitable distributions out of a Roth IRA is not nearly as attractive as taking distributions out of a traditional IRA. Reason: You or your heirs can take federal-income-tax-free Roth IRA withdrawals after the account has been open for at least five years. So with a Roth IRA, the only obvious advantage to the qualified charitable distribution strategy is that it will reduce your taxable estate.

Example: Let's say you’re 71-years-old and financially comfortable. You have $120,000 in one traditional IRA and $90,000 in another traditional IRA, for a combined total of $210,000 in the two accounts. You’ve made a total of $35,000 in nondeductible contributions to the accounts. The remaining $175,000 is from deductible contributions and account earnings.

Before the end of 2006, you decide to take advantage of the new qualified charitable distribution rule by donating $100,000 out of IRA Number One (leaving a balance of $20,000 in that account).

The qualified charitable distribution is treated as coming out of the taxable portion of your IRAs. So after the distribution, your IRA balances total $110,000 ($20,000 in IRA Number One and $90,000 in IRA Number Two). Of that $110,000, $75,000 is taxable money (the original $175,000 minus the $100,000 donated to charity), and $35,000 is nontaxable money (the entire amount of your nondeductible contributions).

The $100,000 qualified charitable distribution is more than enough to fulfill your 2006 required minimum distribution obligation for your IRAs, but you owe no federal income tax. This equates to an immediate 100 percent write-off for the $100,000. In addition, your required minimum distribution obligations for future years have been substantially reduced because the amount in your IRAs has been reduced by $100,000. And you still have the entire $35,000 of nontaxable money in your IRAs, which you or your heirs can withdraw tax-free later on. Last but not least, you’ve lowered your taxable estate by $100,000.

In 2007, you can make another qualified charitable distribution, if you choose.

This new strategy can be a tax-smart move for well-off taxpayers age 70 1/2 or older. However, call us at (856) 665-212 before going forward to ensure it is right for you and the rules are properly followed. Ronald J. Cappuccio, J.D., LL.M.(Tax) 1800 Chapel Avenue West Suite 128 Cherry Hill, NJ 08002 Phone:(856) 665-2121      Fax: (856) 665-9005 Email:

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