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12.04.2009 - Window Closing on a Tax Strategy

The 2008 Economic Stabilization Act extended the window for tax-free rollovers from IRAs to charity, but that opportunity evaporates at the end of this year. Until then, owners of traditional IRAs and Roth IRAs who are at least age 70½ may transfer up to $100,000 from their IRAs without having to report the gift as taxable income and pay tax.

Why limit the tax break to older IRA owners? Age 70½ is when owners of traditional IRAs must begin receiving taxable required minimum distributions every year. Rollovers to charity may be counted toward these required distributions and need not be reported as income. Therefore, for these taxpayers it would be easy simply to arrange for their RMD to go to charity if they didn’t need the money for retirement expenses.

However, that impetus is absent this year, because required minimum distributions are suspended for 2009. Still, if you are philanthropically minded and are looking for a source of funding for a significant charitable gift, your IRA might be a good choice.

You have until December 31 to arrange a rollover for 2009. If your spouse has a separate IRA, provided that all the rules are satisfied, he or she is entitled to make a charitable IRA rollover as well.

Why not withdraw the money and then make the gift?

If you take a distribution from your IRA and then contribute the amount to charity, you will be able to write off your contribution only if you itemize your deductions. Nonitemizers get no tax benefit from their charitable gifts, so the gift from an IRA creates a tax break for them. But it’s preferable, too, even if you itemize your deductions, because an IRA distribution inflates your adjusted taxable income (AGI), a measuring touchstone for many tax deductions, exemptions and other benefits.

For instance, if you are making large gifts relative to your AGI, your charitable rollover isn’t counted toward the cap on your overall charitable contributions (50% of your AGI). Additional taxable income could mean more income tax on your Social Security or that you might not receive the full amount of your itemized deductions. A larger AGI can affect your personal exemptions and reduce the size or even the availability of certain deductions.

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