Dear Carrie: Can you make a gift to charity from your Individual Retirement Account in 2011 and not have to pay a tax? --A Reader
Dear Reader: I'm glad you're asking this question now because, while it's possible to make a charitable gift from your IRA without paying income taxes on it in 2011, you have to act quickly -- and you also have to be at least 70 1/2 years old. (Yes, sometimes age does have its privileges.)
What you're referring to is an IRA charitable rollover, which is a distribution made directly from an IRA to a qualified charity. While you pay income taxes on regular distributions from an IRA, these charitable IRA distributions aren't considered part of your Adjusted Gross Income, so you don't pay taxes on them. Last December, President Obama signed legislation extending this beneficial tax treatment through 2011. As of this writing, it's uncertain whether it will be extended into 2012, so currently you have until Dec. 31 to make this type of gift.
However, an IRA charitable rollover isn't just a question of timing. As you can imagine, the IRS has some definite parameters for determining if a gift from your IRA qualifies. And even if it does, you'll want to take a look at your own tax situation to decide if it makes economical sense for you. So before you act, make sure you understand the following important points.
The basics of an IRA charitable rollover are fairly straightforward:
--You must be at least 70 1/2 years old when you make the gift.
--The charity must be recognized by the Internal Revenue Service as a 501(c)(3) organization.
--The gift must be made directly from the IRA trustee (your bank or brokerage firm) to the charity.
--Your total IRA charitable distributions cannot exceed $100,000 in any tax year.
--You must get written acknowledgement of your contribution from the charity.
--You must act within the specified time limits. Currently, this means that funds must be transferred from your IRA to the charity by Dec. 31, 2011.
If you meet all these conditions, you won't pay income taxes on your gift. Another plus is that your IRA charitable rollover counts toward your Required Minimum Distribution. The flipside is that you can't claim a charitable deduction for the gift.
IS IT RIGHT FOR YOU?
While lowering taxable income and giving a gift tax-free can seem like a great idea for anyone, there are those donors for whom it may be even more appealing. For instance, if you have a well-funded IRA and more than enough assets to live on or pass on to your heirs, this could be a good way to extend your charitable giving while potentially lowering your tax bill. It could also be advantageous if you've already exceeded your charitable contribution limit and want to give more.
Plus, in terms of simplifying your tax situation, this type of gift could lower your Alternative Minimum Tax, lower the amount of tax you might have to pay on your Social Security benefits or just eliminate the paperwork otherwise needed to itemize and claim a charitable deduction. As you can see, from a tax perspective there's a lot to consider. As always, I recommend that you speak with your tax advisor to make sure this type of gift is the right move for you.
HOW TO DO IT
Once you decide to make an IRA charitable rollover, the process is pretty easy. Simply write to your IRA plan provider requesting a distribution to your designated charity. I'd also request that your name and contact information be included with the contribution check to ensure you get credit for the gift.
At the same time, write to the charity informing them of the gift and ask them to send you a written statement of the amount and confirmation that the organization is a public charity qualified to receive IRA donations.
A COUPLE OF CAVEATS
IRA charitable rollovers can only come from an IRA --whether that's a traditional IRA or a Roth. You can't make donations from retirement plans such as a 403(b) or 401(k). Also, you can't direct these contributions to donor-advised funds, charitable gift annuities or charitable remainder trusts.
If the timing or conditions don't work for you, you can still give a gift from your IRA by first taking the distribution as income, then itemizing and claiming a charitable deduction on your tax return. Whatever the method, it's great that you're making charitable giving part of your financial plan. It's something I think everyone who has the means should consider.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at firstname.lastname@example.org. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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