New Tax Law Offers Charitable Giving Advantages

By Jeffrey W. Jones, Esq. and Jack A. Frost

The new tax law signed by the President on Dec. 17, 2010, allows owners of IRAs and other “qualified” retirement accounts to make distributions to charity, excluding the distribution from taxable income. This revives the similar law that expired at the end of 2009.

Here’s how it works:

• Only taxpayers who have reached the date on which they are required to make minimum annual withdrawals (age 70½) may take advantage of this procedure.
• The maximum amount that may be distributed to charity is $100,000 per taxpayer account.
• Distributions for calendar year 2010 may be made through Jan. 31, 2011.
• The distributions will count against the taxpayer’s minimum required withdrawal for the year, but will not be counted as “income” for federal income tax purposes.
• The distribution must meet all the qualifications required to be 100 percent deductible as a charitable contribution for federal income tax, but no charitable deduction will be allowed.

At first glance one might think, “What’s the advantage?” but read on. Even without the deduction, making a distribution to charity can be an advantage for the donor who is required to take an IRA distribution that he/she does not need or want to pay tax on. Making the charitable distribution will be even more beneficial if including the minimum required distribution in taxable income would push him/her into a higher bracket. Naturally, if the donor took the distribution and paid the tax, he/she would have some cash left, but if the distribution is made to charity there is no cash left.

This can be a great idea for a donor who is charitably inclined to begin with. Such donors are often advised to make gifts at death by directing that distributions be made from IRAs and qualified plans. A tax-exempt charity is the only beneficiary to whom the distribution is worth 100 cents on the dollar. After payment of state and federal income taxes and estate taxes, the IRA distribution is often worth less than 50 cents on the dollar to family members. A lifetime charitable IRA distribution gives the IRA owner who had already planned to make such a distribution at death the chance to see it put to good use while he/she is still living.

Jeffrey W. Jones, Esq. serves as vice chairman of Maine Coast Healthcare Foundation and Jack A. Frost is the organization’s executive director.