Featured Article
Good News from Washington: Charitable Treasure Buried in Massive Pension Legislation
Published August 17, 2006
It took nearly a decade, but Congress has finally enacted legislation as part of the Pension Protection Act of 2006 (PPA 2006), which offers charitably minded individuals a golden opportunity to make gifts from their IRAs and exclude the amount of their gifts from gross income.
To qualify:
- The donor must be 70 1/2 years of age or older;
- The transfers must go directly from the IRA to qualified charities;
- Gifts cannot exceed $100,000 per taxpayer per year; and
- Gifts must be outright.*
* Transfers to donor advised funds, support organizations, and charitable remainder trusts and for charitable gift annuities do not qualify.
This opportunity is only available for 2006 and 2007, and no charitable income-tax deduction is allowed.
Prior to the new act, individuals withdrawing $100,000 from their IRAs and contributing it to charity would have had to include the $100,000 in their income and would have been allowed a federal charitable income-tax deduction of up to $100,000 (subject to limits of deductibility) to offset the inclusion. Ostensibly, for most taxpayers, the net result was zero tax implication—a "wash" for all practical purposes. But for those taxpayers unable to use some or all of the charitable deduction, the new law presents a significant opportunity.
So, who benefits from the Pension Protection Act of 2006?
- Individuals who are required to take minimum withdrawals but don't need additional income can satisfy the distribution requirement with a transfer to charity.
- Individuals who usually give up to 50% of their adjusted gross income—the ceiling on the allowable charitable deduction for any year—can now give up to $100,000 more from their IRA accounts, which is not subject to this limitation or taxed as a distribution. This could enable taxpayers to avoid up to $35,000 ($100,000 x 35%) in federal income tax on IRA distributions for this and next year.
- Individuals who are subject to the pesky 2% rule, which requires that itemized deductions be reduced by 2% of adjusted gross income in excess of $150,500 for this year. Before PPA 2006, a $100,000 withdrawal followed by a gift could result in the loss of $2,000 in deductions and up to $700 in tax savings ($2,000 x 35%).
- Individuals who live in states where a charitable deduction is not available (check with your advisor) for state tax purposes. The new act can result in savings of up to $7,000 in some cases because the direct transfer of $100,000 from your IRA to charity will not show up in adjusted gross income.
- Individuals who do not itemize and who make a charitable gift in an amount less than the standard deduction ($10,300 for married couples, $5,150 for single filers) will benefit from a transfer directly from their IRA to charity.
- Individuals whose major assets reside in their IRAs will find it convenient this year and next to make direct transfers to charity from their IRAs without the hassle of having to report the transfer on their income-tax returns.
This is only a summary of the Pension Protection Act of 2006 (PPA 2006). To learn more about how this will impact your gift planning with Clarkson, or to discuss other charitable giving options with a member of our staff, Please Contact Us.