DIRECT TRANSFER OF IRA ASSETS TO CHARITY

DIRECT TRANSFER OF IRA ASSETS TO CHARITY

The following is a summary analysis of the Pension Protection Act of 2006 relating to direct transfer of IRA assets to charity. The outline comes from a presentation given earlier this week. For those few of you that may have attended the presentation, you have already seen this!

1. THE PROBLEM

----a. If an amount withdrawn from a traditional individual retirement arrangement ("IRA") or a Roth IRA is donated to a charitable organization, the rules relating to the tax treatment of withdrawals from IRAs apply to the amount withdrawn and the charitable contribution is subject to the normally applicable limitations on deductibility of such contributions.

--------i. A taxpayer who takes the standard deduction (i.e., who does not itemize deductions) may not take a separate deduction for charitable contributions.

--------ii. Under present law, total deductible contributions of an individual taxpayer to public charities, private operating foundations, and certain types of private nonoperating foundations may not exceed 50 percent of the taxpayer's contribution base, which is the taxpayer's adjusted gross income for a taxable year (disregarding any net operating loss carryback).

--------iii. Contributions of cash to private foundations and certain other charitable organizations generally may be deducted up to 30 percent of the taxpayer's contribution base.

--------iv. Present law imposes a reduction on most itemized deductions, including charitable contribution deductions, for taxpayers with adjusted gross income in excess of a threshold amount, which is indexed annually for inflation. The threshold amount for 2006 is $150,500 ($75,250 for married individuals filing separate returns). For those deductions that are subject to the limit, the total amount of itemized deductions is reduced by three percent of adjusted gross income over the threshold amount, but not by more than 80 percent of itemized deductions subject to the limit.

------------(1) Although through 2009 the limit is reduced.

----b. Thus, if a taxpayer withdrew funds from an IRA and gave them to charity, he or she would likely have income equal to the withdrawal, but the offsetting charitable deduction could be limited or nonexistent, thus giving rise to income tax.

2. THE NEW PROVISION

----a. The provision provides an exclusion from gross income for otherwise taxable IRA distributions from a traditional or a Roth IRA in the case of qualified charitable distributions.

----b. Qualified charitable distributions are taken into account for purposes of the minimum distribution rules applicable to traditional IRAs to the same extent the distribution would have been taken into account under such rules had the distribution not been directly distributed under the provision.

--------i. An IRA owner who makes an IRA qualified charitable distribution in an amount equal to his RMD for that tax year is considered to have satisfied his Code Sec. 408(a)(6) minimum distribution requirement for that year, even though a charitable entity (and not the IRA owner) is the recipient of the distribution.

3. LIMITATIONS

----a. Applies for distributions made after December 31, 2005 and before January 1, 2008.

----b. The exclusion may not exceed $100,000 per taxpayer per taxable year.

----c. Transfer must be made on or after the date on which the individual for whose benefit the IRA is maintained has attained age 70-1/2 .

----d. The provision does not apply to distributions from employer-sponsored retirements plans, including SIMPLE IRAs and simplified employee pensions ("SEPs").

----e. Transfer must be direct from the IRA trustee to the charity.

--------i. A distribution made to an individual, and then rolled over to a charitable organization, would not be excludible from gross income.

----f. Charitable recipient cannot be a supporting organization described in section 509(a)(3) or a donor advised fund (as defined in section 4966(d)(2), nor a nonoperating private foundation.

----g. Applies only if a charitable contribution deduction for the entire distribution otherwise would be allowable (under present law), determined without regard to the generally applicable percentage limitations.

--------i. Thus, for example, if the deductible amount is reduced because of a benefit received in exchange, or if a deduction is not allowable because the donor did not obtain sufficient substantiation, the exclusion is not available with respect to any part of the IRA distribution.

--------ii. If the IRA owner has any IRA that includes nondeductible contributions, a special rule applies in determining the portion of a distribution that is includible in gross income (but for the provision) and thus is eligible for qualified charitable distribution treatment.

----h. No charitable deduction allowed to taxpayer for the transferred amount.

4. MISC.

----a. An individual's tax-free IRA donations may consist of one or more distributions, from one or more IRAs, donated to one or more charitable organizations, as long as the aggregate amount does not exceed $100,000 in a year.

----b. There is no carryover of unused $100,000 amounts - use it or lose it.

----c. There is nothing under the IRA charitable rollover provision that requires an IRA trustee to make distributions to charity at the direction of the account owner, or to ensure that the distributions qualify as "qualified charitable distributions."