Maximizing IRA-rollover giving

The act, passed by Congress on August 3, 2006, allows donors to make tax-free distributions from their individual retirement accounts while avoiding the pitfalls that have caused hesitancy about this type of giving in the past.

Used correctly, it can spur additional charitable donations.

Question:

How does the new law affect IRA gifts?

Answer:

* Previous tax hits.

Under the previous law, distributions from individual retirement accounts to charities counted toward a donor’s taxable income.

For some donors, depending on their taxable income and the size of the donation, the law meant charitable contributions from IRAs could result in paying more in income taxes.

* New tax incentives.

Under the new law, distributions from IRAs — but not corporate pension or 401(k) plans — are excluded from the taxpayer’s taxable income if paid directly to a charity.

By going directly from the IRA to the charity, without passing through the donor’s hands, the money is no longer counted as income for the donor, which means there is no effect on income taxes.

But be aware that the new law is limited to IRA distributions of $100,000 or less per year, the donor must be over 70-and-a-half years old, and donations can’t be to donor advised funds or supporting organizations.

Given that the law is in effect only for the balance of 2006 and 2007, many charities are asking their top donors to commit to a $200,000 IRA gift, payable $100,000 in December 2006, and the remainder in January 2007.

* Additional points to consider.

In order for fundraisers to mobilize an influx of donations, it is crucial to understand the charitable IRA rollover provisions of the Pension Protection Act and be able to explain their benefits.

In particular, donors should be aware that the distribution must be made directly from the IRA custodian to the charity; it cannot be made first to a donor who subsequently transfers it to the charity.

And the donor cannot receive any tangible benefits from the charity in exchange for the distribution from his or her IRA.

–Compiled by Laura Newman


David Wheeler Newman is a partner at Mitchell Silberberg & Knupp and serves as chair of the firm’s Family Wealth Planning and Tax practices. He is based in Los Angeles.

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