Thinking ahead to your 2011 taxes: Incentives for gifts from your IRA
As you know, distributions from Individual Retirement Accounts (IRAs) are generally taxed as income. However, through December of 2011, individuals aged 70 ½ or older can make direct transfers of up to $100,000 in 2011 from their traditional or Roth IRAs to qualified public charities such as Interfaith Alliance, without having to count the distributions as taxable income. This is a result of Congress extending the IRA Charitable Rollover provision as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
The IRA Charitable Rollover provision allows people to make immediate charitable gifts from their retirement assets when they have been discouraged from doing so previously because of the income tax penalty. Since the provision was first enacted in 2006, Americans have donated millions of dollars to nonprofits around the country through their retirement accounts.
As you know, once you reach age 70 ½, you are required to take minimum distributions from your retirement plans each year, and an IRA Charitable Rollover counts toward your minimum required distributions for the year. So if you do not need the additional income provided by the minimum required distribution, transferring all or a portion of your required disbursements to a charity is a great way to make an immediate charitable gift.
How does an IRA Charitable Rollover to Interfaith Alliance work?
Transfers must be made directly from your IRA account to Interfaith Alliance. If you have assets in 401K and 403B accounts, you must first roll those funds into an IRA and then direct your IRA provider to transfer the funds directly to Interfaith Alliance. If you make a donation to the charity as a result of a received disbursement, the disbursement will be considered taxable income. The key is to inform your IRA provider to make the transfer directly from your IRA account to Interfaith Alliance.
What pros and cons should I consider?
Making an IRA Charitable Rollover may not be the most advantageous giving option for everyone. The drawback to this giving option is that you are not allowed an income tax charitable deduction for your gift. Given that, you’re probably wondering why you would want to make a donation to Interfaith Alliance from your IRA. If your charitable gifts for the year already equal 50% of your adjusted gross income, you would not benefit from a charitable deduction for additional gifts. Also, not having a charitable deduction would not affect your federal taxes if you do not itemize deductions to begin with.
Another important consideration, although you do not recognize the transfer to the charity as taxable income for federal income tax purposes, is that some states have a state income tax and will include this transfer as income. But some of these states will allow for a state income tax charitable deduction.
Again, the IRA Charitable Rollover provision allows people to make immediate charitable gifts from their retirement assets when they have been discouraged from doing so previously because of the income tax penalty. But remember, current legislation extends the IRA Charitable Rollover provision through only December of 2011.
As always, please consult with your financial advisor or attorney to ensure that all your objectives are met, as gifts have varying benefits depending on if they are made outright during life or through a bequest. All legal and accounting documents should note Interfaith Alliance Foundation as the recipient of an IRA Charitable Rollover. Interfaith Alliance Foundation is a 501(c)(3) nonprofit organization with tax identification number 81-0587332.
For more information on this and other estate planning options, please email [email protected].