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Tuesday, August 15, 2006

TRICKS AND TIPS IN QUALIFYING FOR THE NEW DIRECT IRA-TO-CHARITY GIFTS

As previously noted, the Pension Protection Act of 2006 provides that for 2006 and 2007, a person aged 70 ½ or older can make charitable gifts directly from an individual retirement account ("IRA") of up to $100,000 per year. While the Act has not yet been signed into law, it is widely expected that President Bush will do so.

This provision of the new law is a boon to taxpayers, since they do not have to treat the IRA transfer as a taxable distribution to themselves, followed by a deductible charitable contribution to a charity. Since the taxpayer may not be able to fully qualify the contribution for the charitable deduction, the taxpayer could be left with more income than deduction, and thus have to pay income tax on a portion of the transfer. Under the new law, the transfer to the charity is neither income to the taxpayer nor deductible by him or her - therefore, the taxpayer cannot end up owing income tax on the transfer.

There are some tricky qualifications that apply to the new provision. Some things to pay attention to in using the new provision include:

-The provision applies ONLY to IRA's. Distributions from other retirement plans, such as 403(b) plans, 401(k) plans, and profit sharing plans and pension plans, are not covered.

-The distribution must be made AFTER the donor attains age 70 1/2. This is different from the IRA distribution rules that cover distributions made in the entire year that an owner attains age 70 1/2.

-There is nothing that forces the IRA administrator to comply with a request to make a distribution to a charity. Therefore, some administrators may decline to make the transfers, either because they are not up-to-speed on the law, or may not want to be botheredadministrativelyy, especially if the gift amount is small. Since the provision will only apply through 2007, some administrators may be inclined to simply ignore it.

-The transfer must be made DIRECTLY from the IRA to the charity. The IRA cannot cut a check to the IRA owner who then issues his or her own check to the charity or endorses the IRA check.

-Organizations qualifying as charitable organizations because they are Section 509(a)(3) supporting organizations or are donor advised funds are not qualified recipients of these transfers.

-Don't wait too long to use the provision, since as noted above, the provision will expire after 2007 (unless extended by a law).
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