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íTis the Season for Giving

The holiday season is a time of giving to your favorite charity and this year the benefits of giving have just gotten better thanks to the U.S. Congress.

January 12, 2009
Sponsored by Thomson Reuters

Congress passed The Emergency Economic Stabilization Act of 2008, which was signed into law by President George W. Bush on October 3, 2008. The Act renews a temporary provision that allows donors aged 70½ or older to make a direct, tax-free rollover of up to $100,000 from a traditional or Roth IRA to a qualified charitable organization but only in 2008 or 2009. A direct rollover will be much better for most donors than a taxable IRA withdrawal followed by a charitable gift. Of course, only donors who are sure they will not need these assets at a later date should consider a charitable IRA rollover.

Tax Benefits

  • The charitable IRA rollover can count toward the donor’s annual IRA required minimum distribution for the year of the gift.
  • No “reduction of deduction” for high income taxpayers: Donors who have an income of $159,950 ($79,975 for married, filing separately) in 2008 and who would normally be subject to a reduction of their itemized charitable deductions may give through the charitable IRA rollover and effectively receive a deduction for the full amount of the gift.
  • Taxpayers who normally take only the standard deduction will get the equivalent of a charitable deduction for their rollover gift in addition to their standard deduction.
  • Taxpayers who do itemize, but who are close to the adjusted-gross-income ceiling on charitable gifts (i.e., the 30% and 50% rules) can make a charitable IRA rollover, which will act like a full charitable deduction for their gift, and avoid the ceiling.
  • Donors who have carryover deductions from earlier charitable donations won’t lose the ability to take the carryover deduction in the year of the rollover as a result of the IRA rollover gift. Normally deductions for current gifts are applied before any carryover deductions and may use up the allowable deduction amount.
  • Because the charitable IRA rollover amount is never recognized as income to the taxpayer, the taxpayer may avoid the deduction reduction based on income levels (i.e., 7.5% floor on medical deductions, two percent floor on miscellaneous-itemized deductions, etc.).
  • A charitable IRA rollover, as opposed to a withdrawal by the taxpayer that would be includable in income, may reduce the amount of social security payments that are subject to tax.
  • If the donor’s state does not normally allow the deductions for charitable gifts, a charitable IRA rollover may act like a charitable tax deduction. Indiana, Massachusetts, Michigan, New Jersey, Ohio and West Virginia do not allow itemized tax deductions, and taxpayers are required to pay state income tax on all charitable donations. By making a charitable donation through a direct IRA rollover, taxpayers exclude the amount from their state income and consequently, from state income taxes. (Note: State laws vary and a tax advisor versed in the tax laws of the stat should be consulted before the charitable IRA rollover is made.)

Donors of any age can still make a deferred gift of an IRA or other retirement account by simply naming the charitable organization as a beneficiary of the account at their death.

To enjoy the full benefit of this opportunity for 2008, you must complete the transfer prior to December 31. Act now to begin the process with your custodian since the final months of the calendar year are very busy for financial institutions.

The Tax and Accounting business of Thomson Reuters offers courses on the Emergency Economic Stabilization Act of 2008. Click to view courses from PASS Online and MicroMash.

— From the CPE & Training Solutions monthly e-newsletter from the Tax & Accounting business of Thomson Reuters, December 2008. To subscribe to this free, informative newsletter, visit trainingcpe.thomson.com or click here.