IRAs are now charitable giving tools

IRA owners who don’t think they will use all of their accounts in retirement have been given a brief opportunity to make charitable gifts directly from their accounts. A temporary tax rule approved this year allows IRA owners who are 70.5 or older to contribute up to $100,000 to a charity without recognizing the contribution as taxable income. Direct contributions from IRAs were authorized recently in the Pension Protection Act of 2006.

Taxpayers have always been allowed to take any sum of money they want from their IRAs and give it to charity if they preferred. However, they had to recognize the withdrawal as ordinary income and pay tax on it. If they were able to itemize their deductions, they could take an offsetting deduction and avoid tax. But not all taxpayers can itemize their deductions, and other rules either limited the amounts they could give to charity or negatively affected their tax bills.

The new rule will allow retired taxpayers who do not have high incomes to make large, one-time gifts. The basic charitable giving rule limits a taxpayer to deducting gifts valued at up to 50% of their income. So a couple with a $50,000 retirement income normally is allowed to deduct only $25,000 in charitable gifts. But with the new rule they could make $25,000 in deductible gifts and withdraw as much as $100,000 tax-free from their IRA and donate that as well.

High income taxpayers who want to make a large gift from their IRAs also will benefit because they will be able to skirt other rules that limit their ability to deduct donations. Without the rule, large withdrawals from an IRA could push their income high enough that their itemized deductions would be reduced or phased out. Now they can do an extra $100,000 in tax-free donations without hitting those limits.

Finally, middle-income retirees whose income is low enough that they escape tax on Social Security income will also benefit. Without the rule they would have had to recognize an IRA withdrawal as income, which would push their total taxable incomes past thresholds that then require them to pay tax on up to 85% of their Social Security incomes.