Attention, IRA owners! If you are over 70 and take required minimum distributions from your IRA account each year, a new law may allow you to support a favorite charity without incurring federal income taxes on the distribution.
A bit of background is appropriate. Each year after the owner of a traditional IRA account reaches age 70, the IRS requires a portion of the IRA's account value to be distributed to the owner. These distributions are taxable as ordinary income. Some IRA owners find that they do not need the additional IRA income for living expenses, and would be inclined to redirect the distribution to charity, particularly if it could also reduce their income taxes.
Until recently, it was difficult to accomplish both goals simultaneously since the value of a tax deduction for the charitable donation did not always fully offset the income taxes owed on the distribution itself.
In August 2006, the Pension Protection Act of 2006 (the "Act") became law. One of its provisions allows up to $100,000 of RMDs per year to be distributed to charity and completely excluded from an IRA owner's taxable gross income, provided certain requirements are met, including:
· The distributions must be made directly from the IRA custodian (typically a brokerage firm or bank) to the charity, so that the distributed money never passes through the hands of the IRA account owner;
· The charity must be a qualified public charity. Although beyond the scope of this article, note that most donor-advised funds and private foundations will not be eligible;
· The distributions to charity must take place on or after the date the IRA account owner reaches age 70, so this technique will not help charitably inclined IRA account owners younger than 70 who are not yet taking RMDs; and
· The act only covers distributions in 2006 and 2007, with no permitted carry-over into future years.
The act is a victory for both public charities, which stand to receive new gifts in the form of redirected RMDs, and participating IRA owners who no longer need to include the value of donated RMDs in their federal taxable income in 2006 and 2007.
Note also that for IRA owners who already took their RMDs this year, or who have RMDs less than $100,000, the act would certainly allow additional distributions to be made to charity (up to $100,000) without incurring federal income taxes.
Finally, the $100,000 limit applies to each individual with a RMD, so if a husband and wife in the 35 percent marginal tax bracket both have large enough IRAs, each spouse could employ this technique up to $100,000, collectively giving the charity as much as $200,000 annually, without incurring federal income taxes on their RMDs.
As always, remember to review such matters with your tax, legal and financial professionals.
If you would like to learn more about this technique, and how it might be used to help your favorite charities, including the Jewish Federation of Greater Philadelphia, call Rachel Gross, Federation Endowments director, at 215-832-0572.
Mark R. Eskin is a senior vice president/investments with Stedmark Partners at Janney Montgomery Scott LLC in Philadelphia. He is an accredited wealth management adviser, and a board member of Federation's Endowments Corporation.