New Tax Law Allows IRA Gift
Giving made easier until January 1, 2008

Judith Sager

President Bush signed into law on August 17, 2006, an important provision of a new tax law that will have the greatest impact in providing tax incentives for new charitable gifts for current or retired faculty members who are 70½ and older. Under the new tax law, taxpayers can now contribute to a charity directly from their Individual Retirement Accounts (IRAs).

The Pension Protection Act of 2006 (PPA 2006), as the new law is called, allows individuals to make distributions of up to $100,000 from their traditional, rollover, or Roth IRAs without those distributions counting as gross income. Prior to PPA 2006, a donor would have had to report the $100,000 withdrawal as income, and then declare an offsetting income tax deduction for the charitable contribution.

The IRA charitable rollover provision has a shelf life, however: It is effective only through December 31, 2007.

To qualify for the rollover provision, donors must be at least 70½ years of age at the time of the transfer; the funds must pass directly from the IRA custodian to the qualifying charity (i.e., a withdrawal followed by a contribution would still need to be reported as income); contributions are limited to $100,000 per tax year; and the charity must be a tax-exempt organization to which deductible contributions can be made.

Contributions may not be directed to donor-advised funds or supporting organizations, nor may they be used to fund charitable gift annuities or charitable remainder trusts. Further, PPA 2006 applies only to traditional, rollover, and Roth IRAs ¾ not to other types of plans like 401(k)s, 457s, 403(b)s, etc. And finally, there is no federal income tax deduction available for such gifts in addition to their income exclusion benefits.

Tax experts anticipate that the window of opportunity will most appeal to qualified donors who have well-funded IRAs and more than enough financial assets to live on or to pass on to their heirs; who need to take minimum distributions from their IRAs anyway –distributions that would normally be taxed; who don’t itemize their deductions; for whom this provision could lower their AMT; whose income level causes the phase-out of their exemptions; who live in states with no charitable deduction; who already contribute at their 50 percent deduction limit; or for whom additional income would cause more of their Social Security distributions to be taxed.

It’s important to emphasize: Congress has specified only a finite period of time in which to make contributions to charitable organizations from Individual Retirement Accounts. The new rules expire on January 1, 2008; thus, anyone who is 70½ now or will be before January 1, 2008 and meets the other qualifications can make a $100,000 charitable gift and benefit from this new law, for each of the 2006 and 2007 tax years.

Before you reach any decisions about using the IRA rollover provision, please consult your attorney, accountant, or other financial advisor to be certain that you are, in fact, eligible to take advantage of this important change in the law.

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