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The Tax Deal and IRA Distribution Donations

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forgetting to take the RMD – which has been known to happen – can result in a nasty penalty – 50% of the amount not withdrawn.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.

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    • What if you have already taken the RMD? Should you pay it back to the IRA holder so as to have the QCD satisfy the regular RMD as promised by the Feds?

About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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