President Bush signed the Pension Protection Act of 2006 (ACT) into law on Thursday, August 17, 2006, which included an IRA charitable gift provision. Under the new law, individuals may make gifts to charity from their Traditional IRA and Roth IRA accounts without any tax liability if their gifts are "qualified charitable distributions." For 2006 and 2007, individuals who are over 70 ½ can make a gift to charity directly from their IRAs. No charitable deduction may be taken, but distributions up to $100,000 will qualify for all or part of the IRA owners required minimum distributions.
How is the Pension Protection Act different from the previous law for IRA gifts?
Under the previous law, any distribution from an IRA or other taxdeferred retirement account is considered taxable income and is subject to tax at ordinary income tax rates unless it is a rollover to another IRA account.
What are requirements for "qualified charitable distributions"?
Gifts are tax-free up to $100,000 per year
Gifts must be made in 2006 or 2007
IRA holder must be age 70 1/2 or older at time of gift
Distributions must be made directly to public charities
Distributions to donor-advised funds or support organizations are NOT permissible
Distributions must be an outright gift to the charity
Distributions may only be made from Traditional IRAs or Roth IRAs
Can I make a charitable gift from my 401(k) or 403(b) plan?
The Pension Protection Act is restricted to distributions from Traditional IRAs and Roth IRAs. Distributions from 401(k), 403(b), SEP, KEOGH and Simple IRA accounts do not qualify. However, it may be possible to roll over your retirement account into a traditional IRA and then make a distribution from it. Talk with your financial planner or IRA administrator about your rollover options.
Can I use my IRA to fund a Charitable Gift Annuity or Charitable Remainder Trust?
Despite efforts of the charitable community, the Pension Protection Act does NOT allow gifts from an IRA to fund a Charitable Remainder Trust or Charitable Gift Annuity. Qualified charitable distributions are limited to outright gifts.
Will my charitable distribution qualify for my required minimum distribution?
Yes. Your gift will be calculated as part of your required minimum distribution. For individuals who would rather not withdraw funds from their IRA, the Pension Protection Act allows them to completely avoid the additional income from their required minimum distribution.
Do I receive a charitable income tax deduction for my gift?
Because the IRA assets haven't been taxed, no deduction is allowed. To receive a deduction, you would be required to treat the distribution as taxable income first, before taking the deduction. In most cases, it is better not to take the distribution as income.
Who benefits most from this new Law?
There are several individual groups who will benefit from the charitable rollover. First, people who normally don't itemize their deductions can avoid taking the IRA distribution as income and give it directly to charity. Second, individuals whose IRA distributions increase their income to a level where 85% of their social security is taxed may want to make a qualified charitable distribution to reduce their income to the level where only 50% of social security payments are taxable. Third, individuals who give over 50% of their income to charity will not be constrained by the 30% and 50% limitations on charitable deductions on gifts from their IRAs. Fourth, individuals in high income brackets and who have large IRAs may have substantial income tax savings not otherwise available because of tax deduction phase-outs and deduction limitations.
Calvin Theological Seminary is a member of Barnabas Foundation. Their goal is to help caring Christians make tax-wise decisions and strengthen support for ministries close to their hearts.
This is general information and is not intended to be tax or legal advice. Please consult your own advisors.
