Centara Connection

New Tax Law Allows For Charitable Contributions From Your IRA

Alan Clopine, CPA, Director of Tax Consulting

There is a new, but temporary, tax law regarding direct charitable contributions from your Individual Retirement Account (IRA). The Pension Protection Act of 2006, signed by President Bush on August 17, 2006, allows individuals over the age of 70½ to contribute up to $100,000 directly from their IRA to a charity in 2007 only. A married couple can each contribute up to $100,000 if they have separate IRAs. This new law applies to both regular IRAs and Roth IRAs. It does not apply 401k plans, SEPs, or other retirement plans.

When you reach the age of 70 ½, the IRS requires that you take an annual minimum distribution, in which you will pay income taxes. The amount that you contribute directly to charity will reduce the amount of required minimum distribution required.

What does this new law mean? Direct contributions to charity from your IRA will not be reported as income on your tax return. However, you won’t get a charitable deduction as well.

So what’s the benefit? Consider this: The maximum allowable deductible charitable contribution is 50% of your adjusted gross income. What if you wish to contribute $100,000 to a charity from your IRA? Under the old rule, assuming that you had no other taxable income (due to tax-free interest), you would have adjusted gross income of $100,000 and only be able to deduct $50,000 of your charitable contribution. This would result in $50,000 of taxable income. Clearly, this is not very tax efficient.

There are additional benefits. High income taxpayers are subject to phase outs of their deductions. Since a direct charitable contribution from an IRA is not included as income, it does not affect the deduction phase outs. Some taxpayers will be able to exclude paying taxes on their social security income. Other taxpayers may be able to eliminate alternative minimum taxes.

Please remember that a charitable contribution must come directly from the IRA. You can’t take the money as a distribution and then donate it, or it will be treated as a regular distribution for tax purposes. Please call me or one of the advisors at Centara Capital if you would like more information on this new tax law.

Centara Capital Management Group, Inc.
8880 Rio San Diego Drive, 4th Floor
San Diego, CA 92108
(619) 398-1700
www.centaracapital.com
info@centaracapital.com

Securities offered through Registered Representatives of Centara Capital Securities, Inc., Member NASD/SIPC. Investment advisory and financial planning services offered through Centara Capital Management Group, Inc., a Registered Investment Advisor. Legal services provided by Centara Legal Group, APC, David Gebhardt, Principal. Insurance #0D85861. CA DRE License No. 01519824