One potential source of contributions sometimes overlooked in charities’ fundraising campaigns is donations of assets from individual retirement accounts. Under the Pension Protection Act of 2006, eligible donors can get a tax break on these contributions if all the IRS rules are followed to a T.
These tax breaks are available to owners of individual retirement arrangements (IRAs) who are older than 70 \xBD and have up to $100,000 in assets transferred directly from their traditional IRAs to the charitable organization. They don’t apply to distributions from employment-related IRAs (known as SEPs or SIMPLEs).
Normally, money saved and invested through a tax-deferred IRA account has to be declared as income in the year it is withdrawn and is taxed at the account holder’s ordinary income tax rate. This applies to both the original investment and any gain in its value, including capital gains. To be eligible for the tax break, contributions of money or assets must be transferred directly by the IRA account trustee to the charity, on instructions from the account holder. Donations that qualify may be excluded from income.
Any donation made under this provision can be counted toward the minimum required distribution that IRA owners must take each year after they turn 70 \xBD. The amount of the donation that is excluded from income is not deductible as a charitable contribution. However, if the donor transfers more than $100,000 or any part of the distribution would not be included in income (for example, because part of the distribution represents a return of non-deductible contributions to the IRA), that portion may be deducted as a charitable contribution.
A few states allow qualified charitable distributions from IRAs to be deducted for state income tax purposes. Donors should check with their tax advisers before counting on this deduction, to make sure their state is among those that allow the donation.
Not all charities are eligible to receive donations under this provision of the 2006 PPA. For example, donor-advised funds and supporting organizations don’t qualify.
Reference:
- IRS Publication 590, Individual Retirement Arrangements (IRAs)
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