Charitable distributions: Pension Protection Act may bring windfall to nonprofits.

• Author: Lieberman, Philip R.
• Position: Estateplanning

While philanthropy continues to be important to our communities, a provision in a recently passed law may make charitable contributions even more pervasive.

The Pension Protection Act of 2006 (PPA) may provide a boost to charitable organizations by permitting older taxpayers to donate--tax-free--up to $100,000 from an Individual Retirement Account, each year for the next two years, to a charitable cause.

How It Works

For years 2006 and 2007, PPA Sec. 1201 will allow IRA owners older than 70 1/2 to roll over up to $100,000 directly to one or more public charities. Therefore, a married couple could donate up to $200,000, provided that each spouse owns at least one IRA.

These qualified charitable distributions (QCDs) are defined as any distribution made directly to an organization described in IRC Sec. 170(b)(1)(A). Thus, "qualified charitable organizations" include public charities and private operating foundations to which the 50-percent income tax deduction limitation applies. Private non-operating foundations are excluded, along with supporting organizations and donor-advised funds.

However, field-of-interest funds, designated funds, scholarships and restricted or general endowments, for which donors or their designees have no advisory rights, are considered suitable QCD recipients.

QCDs must come only from regular and Roth IRAs. A charitable distribution from a regular IRA is preferable, since Roth IRAs already allow tax-free distributions. Distributions from other forms of retirement plans--such as 401(k), 403(b) annuities, defined benefit and contribution plans, profit-sharing plans, Keoghs and employer sponsored SEPs and SIMPLE plans--are not eligible.

For some donors, it's possible to establish an IRA and then simply roll over assets to it from another plan. This IRA may then make a QCD. Note that QCDs may include only amounts that otherwise would be taxable if distributed directly to the IRA participant.

Some owners, however, make nondeductible contributions to their IRAs that, if withdrawn, would be considered a tax-free return of nondeductible contributions. Such distributions are not deemed acceptable as a QCD.

How It's Reported

With the IRA rollover, there is no charitable income tax deduction for the distributions, and the distribution itself is not included in the donor's taxable income. This should simplify tax reporting and provide potential favorable tax benefits resulting from a lower adjusted gross income.

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