It pays to give: save taxes on charitable distributions from your IRA.

• Author: McKinney, William L.
• Position: ADVICE: TAXES

THE PENSION PROTECTION Act of 2006 (PPA) was introduced August 17, 2006, as the first pension reform in over 30 years. While the act contains numerous changes to the pension tax provisions for large corporate businesses, there are also several provisions concerning charitable contributions for individuals.

Tax-free distributions from IRAs. Individuals age 701/2 or older can distribute up to $100,000 of their IRA balances to charitable organizations in 2006 and in 2007 without recognizing income and without taking a charitable deduction. The distribution also counts towards the required minimum distribution.

While the deduction is available for a limited group of individuals, it could result in a large windfall for elderly individuals who have not itemized in previous years but have been required to take a minimum distribution. The approximately two-thirds of taxpayers who take the standard deduction--and thus cannot deduct charitable gifts--can now get the equivalent of a deduction by making gifts directly from their IRAs to qualified charities.

By making a distribution directly to a favorite charity, individuals can also eliminate taxable income that could cause Social Security benefits to be taxable. In addition, a direct, tax-free distribution will eliminate the 2 percent (formerly 3 percent) "haircut" rule in 2006 and 2007. Thus, a donor with adjusted gross income above $150,500 ($75,250 if married filing separately) who elects to make a qualified charitable deduction from an IRA will not have the tax benefit of the gifts whittled down as it would have been if he made a "traditional" gift directly to the charity.

In addition, since some states, including Indiana, do not allow charitable deductions, a charitable gift from the donor's IRA will be the equivalent of a state income tax charitable deduction if the distribution is not subject to state income tax. Caution: As of November 27, 2006, no tax law changes have been implemented to make the distribution taxable in Indiana.

For a direct distribution to an organization to be a qualified charitable distribution, the entire amount...