Last Chance for IRA Charitable Contributions

We are approaching a last chance for some taxpayers to use IRAs to make tax-advantaged gifts to charity. The tax break is set to expire after Dec. 31, 2007.

The Pension Protection Act of 2006 allowed IRA owners who are at least age 70½ to make gifts directly from the IRA to a charity. The donation is not included in the IRA owner’s gross income if the transfer is made directly from the IRA custodian to the charity. The contribution does count toward the owner’s required minimum distribution for the year. The owner does not get a tax deduction for the contribution. The maximum donation that is allowed this treatment is $100,000 annually.

Before the 2006 law, the transaction would be treated as a distribution to the owner that would be included in gross income. That would be accompanied by a charitable contribution deduction. But the owner would have to itemize deductions on Schedule A to benefit from the deduction, and part of the deduction might have been phased out or eliminated for higher income taxpayers. That still is the treatment for taxpayers under age 70½ and will be the treatment for charitable transfers from IRAs for all taxpayers after Dec. 31 unless Congress extends the provision. To get the favorable treatment, the gift must be completed by Dec. 31, regardless of when you issued instructions to your IRA custodian.

Only gifts directly to qualified charities receive the treatment. Excluded are transfers to charitable gift annuities, Charitable Remainder Trusts, private foundations, and donor-advised funds.
Some IRA owners are concerned that the charity will not know the original source of the gift, since it will come from the IRA custodian. That is possible. It won’t matter for tax purposes, since the IRA owner is not entitled to a tax deduction.

To let the charity know the source of the gift, one option is to receive a check from the IRA custodian made out to the charity and deliver the check to the charity yourself. The check must be made out to the charity and be from the IRA custodian. Another option is to request the IRA custodian include your account number on the check or transfer. Also, let the charity know that a gift from your IRA is on the way.

More details about qualified charitable distributions are in IRS Notice 2007-7. On the IRS web site at www.irs.gov, type “Notice 2007-7” in the search box. On the next page, click on “Internal Revenue Bulletin – Jan. 29, 2007 – Notice 2007-7.”