Taxpayers over age 70-1/2 with an IRA have a year-end tax planning opportunity. For these folks, if they make a "Qualified Charitable Distribution" in 2009 they can achieve some significant tax savings. People over age 70 1/2 can exclude from income up to $100,000 this year in IRA distributions if it's distributed directly to a qualified charitable organization. A qualifed charitable organization includes non-profit organization recognized by the IRS under Code Section 501(c)(3). A 501(c)(3) organization is operated for religious, charitable or scientific purposes. A qualified public charitable organization however doesn't include contributions made to donor advised funds, private foundations and supporting organizations. Understand however that there is no double benefit allowed. If an IRA distribution qualifies and an election is made to exclude it from income, then there is no charitable donation.
Why should you consider this?
First, taxpayers who don't itemize their deductions aren't getting any income tax benefit from their charitable donations.
Second, for taxpayers who do itemize their deductions, they may be subject to limitations on their charitable deductions. Cash donations are limited to 50% of Adjusted Gross Income ("AGI"). Appreciated property donations are generally limited to 30% of AGI. Any amounts over this can be carried forward and deducted over the next five years.
Third, by making this election, AGI will be lower as this IRA distribution isn't included in income.
Fourth, a qualified charitable distribution from an IRA reduces gross income and may be reducing the taxable portion of any social security income benefit.
Fifth, some states income tax is based on AGI. Therefore, taxpayers making this election may also be reducing their state income tax.
Finally, by making this election, the amount that is donated is out of your estate.
ACTION ITEM: People who are interested in this strategy should take a hard look at it. But you better hurry. Unless it gets extended, this tax provision expires in 2009.