IRA distributions to charities.

• Author: Ervin, Rosemary F.

Pension Protection Act of 2006 (PPA '06) Section 1201 (a) added Sec. 408(d)(8), introducing the concept of qualified charitable distributions from IRAs. For 2006 and 2007 only, taxpayers over age 70 1/2 can instruct an IRA trustee to make direct gifts of up to $100,000 to qualified charities, without having to report the IRA distributions as income on their Federal tax returns. Because these distributions will not be included in income, the donor cannot take a charitable deduction.

Using IRA distributions to make charitable gifts may be more advantageous than traditional gifting. Outside of the two-year window, the taxpayer must take a taxable distribution from the IRA and report the income; a donation is reported as an itemized deduction subject first to the charitable deduction limits, then to the itemized deduction phaseout. The additional income may not be offset by the deduction because of the complexity of the tax law (primarily, the alternative minimum tax and the limits on deductions).

Limited Scope

Although the new provision is an excellent opportunity for older taxpayers to contribute retirement plan assets to charity without recognizing income, its scope is limited. Ideally, the IRA distribution will be a required distribution not otherwise needed by the donor. The provision is valid for only two years and is limited to $100,000 each year. The donor must be over 70 1/2 and the recipient must be a qualifying charity; donor-advised funds and private foundations do not qualify. Qualifying charities are defined in Sec. 170(b)(1)(A) as churches, educational institutions, hospitals and other similar entities. The IRA trustee must make the distribution directly to the qualifying charity.

No benefits can be received in exchange for the donation and taxpayers must meet all substantiation requirements. (The PPA '06 also added more stringent recordkeeping requirements for charitable contributions. Its changes codified the rules in the regulations...