Using retirement benefits to achieve charitable objectives.

• Author: Bazley, Thomas E.

For taxpayers who desire to give to charitable organizations, using retirement benefits to make those gifts is an ideal way to accomplish their objectives. Because of the charity's tax-exempt status, money from retirement plans is effectively worth more to the charity than it would be to a beneficiary who must pay tax on the receipts. If the taxpayer has funded the retirement plan with pretax dollars, the money will go to the charity without ever having been taxed. This article explores a few options for taxpayers to use retirement plan benefits to fund charitable desires.

Lifetime Giving

Qualified charitable distributions: The Pension Protection Act of 2006, P.L. 109-280, created a tax-efficient way for taxpayers age 70 1/2 and older to give to charity any distributions from their IRAs that would otherwise be taxable to them. These qualified charitable distributions were originally available only for 2006 and 2007, but the provisions have been extended until December 31, 2011, by the Tax Extenders and Alternative Minimum Tax Relief Act of 2008, P.L. 110-343, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312. The law allows taxpayers who are at least age 70 Yi to exclude from income up to $100,000 of amounts transferred from an IRA directly to a qualified charity. The transferor cannot take a deduction for the charitable contribution, but the ability to avoid the tax on the distribution itself can still be valuable.

Advantages: Among the advantages of making qualified charitable distributions are the following:

* The amount transferred to charity is excluded from income. As such it is not included in adjusted gross income (AGI). Those tax items that are AGI sensitive (e.g., taxable Social Security benefits, medical expenses, miscellaneous itemized deductions subject to 2% of AGI) may be more valuable because of the lower AGI. In states that base the state taxable income solely on federal AGI, the state tax is reduced as well.

* The distribution counts toward the required minimum distribution (RMD) amount.

* The aggregation rules of Sec. 408(d)(2) do not apply.

The third item above is especially valuable for taxpayers whose IRAs contain after-tax contributions, and it may even present planning opportunities. Normally, if a taxpayer's IRA contains both deductible and nondeductible contributions, each distribution contains deductible dollars (taxable) and nondeductible dollars (nontaxable) in the same ratio that they make up the IRA. For example, if a taxpayer has an IRA with a value of $100,000 and has made $10,000 of nondeductible contributions to the IRA, 90% of each distribution will be taxable and 10% will represent a tax-free return of the taxpayer's basis in the IRA.

Under the qualified charitable distribution ordering rules, the distribution is deemed to come first from deductible contributions and would "use up" basis only to the extent that the distribution exceeds the aggregate amount that would have been included in the taxpayer's income if all amounts in the taxpayer's IRAs were distributed...