New Law is Good News for Taxpayers

By John W. Mee, Jr., Esq. - Copyright 2006

 

If you are a taxpayer age 70 ½ or older, you have a new “tax-wise” way to make gifts to your favorite charities.  The new way is to make your gifts directly from your IRA to the charities.

 

The prior law required a two step process to make gifts from your IRA to charities.  First, you had to take a distribution from your IRA, and reflect it as income on your tax return.  Second, you made your charitable gift and took a charitable deduction on your tax return.  Under the new law, you can have your IRA administrator make your charitable gift directly from your IRA to charity.

 

1.       What benefits might result from making your charitable gifts directly from your IRA?

 

The amount of your gifts made this way reduces your minimum required distribution (“MRD”) dollar for dollar.  In addition, distributions from your IRA made directly to the charity are not shown as income on your income tax return.

 

For donors who normally take only the standard deduction, this is a way to get a charitable deduction previously available only to those who itemized.

 

For some donors, making charitable gifts direct from their IRA might drop the percentage of Social Security income subject to income tax from 85% to 50%.

 

For major donors, charitable gifts made this way are not subject to the 50% of adjusted gross income limitation on charitable gifts.

 

2.       What rules need to be followed to get the above advantages?

 

You must be 70 ½ or older.

 

Each gift must be made by the administrator of your IRA directly to a “Qualified Charity”, such as Central Oklahoma Habitat for Humanity. 

 

The total gifts from all of your IRAs cannot exceed $100,000 in 2006, and $100,000 in 2007.

 

The gifts must come from “traditional” IRAs.  Gifts from Roth IRAs, SEP IRAs, 401k plans, 403(b) plans, etc., do not qualify.

 

3.       Other important considerations?

 

This tax break is only available in 2006 and 2007.  Don’t miss 2006 by failing to act promptly.  Since the law is so new, the administrator of your IRA needs adequate lead time to properly process your gift requests for 2006. 

 

This article is intended only to let you know about a new law.  It is very general in nature and not intended to be legal or tax advice.  Before making any gifts from your IRA, you must consult with your own tax advisor as to whether you should make the gift, whether the donee is a “Qualified Charity” and exactly how the gift will affect your own tax situation.

 

About the Author

Mr. Mee holds business and law degrees from O.U. He also holds a Master of Laws in Taxation from N.Y.U.  Mr. Mee is a Fellow of the American College of Trust and Estate Counsel.  His office is at 50 Penn Place in Oklahoma City.  He may be contacted at 848-9100 or jwmjr@meehoge.com.  This Article is for general information purposes only.  It is not legal advice by Mr. Mee or Mee, Mee & Hoge, PLLP.