If you are a not-for profit organization, you should know that the tax law that was passed in late December 2010, Congress temporarily reinstated a provision allowing taxpayers receiving taxable IRA distributions to make donations of up to $100,000 to their favorite charity. The great thing about this tax provision is that the donor does not have to include the gift as income.
This is one of those win-win situations for everyone involved. For not-for profits looking to generate additional donations this year, it is a great way of reaching out to older donors who may be subject to IRA minimum distribution rules. For the donor, it represents a potentially more tax efficient way of contributing to their favorite charities.
So how does it work?
- You must be at least 70½ years old.
- The amount you donate to charity from your IRA is considered part of your required minimum distribution.
- You can’t give more than $100,000 per year.
- You can only do this through the end of 2011.
- You can’t withdraw the money from your IRA and then give it to the charity; it must be transferred from your IRA directly to the charity.
- You can’t write off the charitable donation. The tax break comes by not having to include the distribution from your IRA in your adjusted gross income.
How would your donors benefit by taking advantage of this new rule?
1. If the donor gives money from their IRA, they get to exclude the entire amount from their income. Thus, if the donor has other deductions that are dependent on the amount of adjusted gross income, they will be able to increase these deductions.
- If the donor does not itemize their deductions (This is typical for people who have paid off their home), they are not getting any tax benefit from their charitable contributions. If they make these contributions from their IRA, however, they will have reduced the amount of their IRA they have to pay tax on.
- If the donor is 70½, they know full well that each year they have to take the required minimum distribution from their IRA—whether they need it to live on or not. Contributing their required minimum deduction to charity removes this from their taxable income.
So pick up the phone and let your older donors that they only have until the end of this year to make a difference in your organization and potentially reduce their tax bill to Uncle Sam.
If you should have any questions or require additional information about donations received from IRA accounts, do not hesitate to contact Larry Sophian at 312.670.7444.