AIP History Center Newsletter
Volume XXXVIII , No. 2, Fall 2006

 

Pension Protection Act of 2006 Offers Tax Benefits in
Using your IRA for Charitable Contributions

The new Pension Protection Act of 2006 may help your charitable gift-giving practices in 2006 and 2007 if you are 75 ½ years old and withdrawing from an Individual Retirement Account (IRA).

IRA and Charitable Gifts: Taxpayers are encouraged to save for retirement through IRAs where their money grows un-taxed until withdrawn in retirement. Withdrawals are considered taxable income at a presumed lower tax rate in retirement than during the taxpayer’s prime earning years thus benefiting the taxpayer. However, significant complications limited the use of IRA withdrawals for charitable gifts. Under the older regulations, donations made through IRA withdrawals required the donor to take an IRA distribution, pay tax on the proceeds, write a check to the charity of choice and then, and only if they itemize their deductions, take an income tax deduction on their tax return. Another discouraging complication included the annual cap of 50% of the adjusted gross income (AGI) on tax-free charitable gifts.

New Act: The new amendment permits tax-free withdrawals for charitable contributions directly from IRA funds not to exceeding a total of $100,000 annually per individual or $200,000 per couple if both hold separate IRA accounts. The rationale behind this new act is to encourage greater charitable giving by removing the tax on donated IRA withdrawals. Donors who have benefited from the un-taxed growth of their IRA now will benefit when making charitable contributions with those funds. Because the donor will not have to recognize income from the withdrawals, their AGI will be lower, so self-employment and social security taxes will be lower. Other benefits may include elimination of the 3% phase-out of charitable deductions, possible avoidance of the alternative minimum tax (AMT), and reduced paper work for those donors who no longer need to itemize their deductions.

Strategy for Donors: Retirees face significant penalties unless they meet required minimum IRA withdrawals. Charitable contributions made through their IRA in 2006 and 2007 can be used to satisfy these minimum requirements. Donors may consider using permissible IRA withdrawals for charitable purposes first before making donations with other
taxable income.

Financial institutions administering the IRA will be able to process the donation and resulting paperwork so the donation process should be easy. If you have questions about
the IRA charitable giving, please e-mail or call the Center at historyfriends@aip.org or 301-209-3006. The AIP Center for History of Physics is a 501(c) (3)
charitable organization.


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AIP History CenterCenter for History of Physics
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