By Eva Rosenberg
Things are looking up for seniors with a bent for charitable giving this year. It looks like Congress is going to buckle down and pass a tax-extender bill – perhaps even before year-end.
The bill would grant a special provision allowing seniors (age 70 ½ or over) to donate up to $100,000 to charities directly from their IRAs. This provision, enacted as part of the Pension Protection Act, initially expired on Dec. 31, 2009.
The upshot: Those who fit the bill could have their IRA administrators transfer up to $100,000 a year from their IRAs directly to a charity. The withdrawal, considered a donation, would be tax-free. There would be no deduction for the charitable donation, but the withdrawal would fulfill the requirement for individuals age 70 ½ or over to take required minimum distributions (RMDs) from their IRAs. The move saves thousands in taxes — particularly useful if you already planned to give that money to charity anyway.
One group this provision benefits in particular is seniors who tithe – but can’t itemize. Remember, donations of as little as $5,000 qualify, not just the biggies that approach or reach the $100,000 limit. This way, that gift to their church doesn’t add to their taxable income and goes further for the nonprofit, too. Someone withdrawing $50,000 and donating it directly to their house of worship means that church gets the whole amount. But $50,000 that’s taxable could shrink that donation by $5,000 to $30,000, depending on your federal and state tax bracket.
RMDs have posed problems for those in a high tax bracket who don’t need the money, can’t really use the charitable contribution and may have been thrown into alternative minimum tax brackets. What’s more, forgetting to take the RMD – which has been known to happen – can result in a nasty penalty – 50% of the amount not withdrawn.
Experts deem the extension of the IRA-to-charity donation provision in year-end legislation likely, according to John W. Roth, Senior Tax Analyst at CCH. Given that IRA administrators probably won’t have time to do all the transfer paperwork, Roth says the Senate’s bill will grant a 2010 deduction to donors making contributions until Jan. 31, 2011.
Readers, will you take advantage of this provision if it’s extended?
Eva Rosenberg, EA, is the publisher of TaxMama.com. Rosenberg is the author of several books, including the newest edition of “Small Business Taxes Made Easy.” She also teaches a tax-pro course at IRSExams.com.