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How to Gift Your IRA Money to Charity and Not Pay Tax on It

 

Now you can use money from your IRA to benefit your favorite charity and not have to include the distribution/gift as income. But only for a limited time—and there are rules to follow.

This is a result of the Pension Protection Act of 2006 which became effective 8/17/06. This 1,000 page new law represents the most sweeping changes to the area of pensions in the last 30 years. One new provision for IRAs involves the ability to use IRA funds for gifting purposes.

Here are the rules:

  1. You must be at least 70 ½ years old.
  2. You can’t give more than $100,000 per year.
  3. You can only do this in 2006 and 2007.
  4. You can’t withdraw the money from your IRA and then give it to the charity; it must be transferred from your IRA directly to the charity.
  5. You can’t write off the charitable donation. The tax break comes by not having to pay income taxes on the distribution from your IRA.
  6. Donations to donor-advised funds are not allowed.
    This is not to say that giving your IRA money to a donor- advised fund is impossible. You can do this outside these new rules, but you would have to declare the IRA distribution as income. Then you would be subject to the charitable income percentage limitations and itemized deduction rules.
  7. Can you accept any gifts of “goods or services” in exchange for your donation (i.e. tickets to events and the like)? No, this will void the tax treatment of your IRA money gift.

You can’t use IRA money to fund a charitable lead trust, a charitable remainder trust or a gift annuity. The general rule here is that you cannot receive a benefit from a gift using IRA funds.

How would you benefit by taking advantage of this new rule?

  1. If you are a high income taxpayer and donate an asset other than an IRA, your charitable contribution could be limited by the factors noted above. However, if you give money from your IRA, you get to exclude the entire amount from your income.
  2. If you do not itemize your deductions. This is typical for people who have paid off their home.
  3. If you are 70 ½ , you know full well that each year you have to take the required minimum distribution from your IRA—whether you need it to live on or not. Contributing your RMD to charity removes this from your taxable income.
  4. If 2006 and 2007 are the years where your favorite charity or church is in the midst of a building program and you have a huge IRA, maybe a $50,000 or $100,000 donation from your IRA is worth thinking about.

    Note: This article contains a listing of the major provisions of this part of the Pension Protection Act of 2006 as I understand it and some situations where you may find it applicable. However, laws change. Laws are amended. I do not practice or interpret the law. Prior to any transaction, you must consult with a qualified tax advisor.

 

 

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