The Pension Protection Act recently passed by Congress has an interesting tax break for older taxpayers.
It offers the chance to donate to charity and reduce taxes at the same time. But like many good deals, it’s a limited time offer. You have only this year and next to take advantage of it.
If you’re age 70½ or older, the new law allows you to donate money directly from your IRA to a charity without paying the usual tax on the IRA withdrawal. You can give up to $100,000 each year, but only for 2006 and 2007.
Be aware of the following tax implications:
- You’ll escape tax on the IRA withdrawal, which is usually taxed as ordinary income.
- If you itemize, you won’t be able to claim a deduction for any amount that would otherwise have been taxable. If you don’t itemize, however, you can still claim the full standard deduction.
- Your donation counts towards the minimum annual withdrawals that you’re required to take after age 70½ (from traditional IRAs).
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Unlike a regular IRA withdrawal, distributions going to charity won’t be included in income. That keeps your reported gross income lower and may qualify you for other income-based tax breaks.
- You can’t make a donation directly from a 401(k) plan. However, you may be able to roll the 401(k) plan into an IRA and then make donations from there.
- The money must go directly from the IRA trustee to the charity. If you take possession of it first, you’ll lose the tax benefit.
If you want to take advantage of this option for 2006, please contact our office as soon as possible.
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