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How Seniors Can Use the IRS Charitable Tax Break for Tax Savings

Those who are aged 70½ or older and have an IRA can once again save taxes by making charitable contributions directly from their IRA. The tax provision allows IRA owners of age 70½ or older to directly transfer, tax free, up to $100,000 a year to one or more eligible charities. The distributed amounts can be excluded from the IRA owner’s income, thus lowering the taxable income. This tax provision has now been made permanent.

tax breaks for seniorsThe older IRA owners can use this option for distributions from IRAs whether they itemize their deductions or not. However, employer-sponsored retirement plans, including SIMPLE IRA plans and simplified employee pension (SEP) plans, are not eligible.

The Wall Street Journal answers questions from their readers about qualified charitable distributions:

“Q: Can I make a transfer from my IRA to my donor-advised fund and qualify for this break?

“A: No. Donor-advised funds, such as those offered by Fidelity Investments, Vanguard Group, Charles Schwab and other financial institutions, don’t count as qualified charities under this provision, says Mr. Rosica of Ernst & Young.

“Q: What about other types of retirement plans? For example, can you make a qualified charitable transfer from a 401 (k) plan?

“A: No, says Mr. Hall of Ropes & Gray. This provision doesn’t apply to ‘distributions from Keoghs, 403(b) plans, 401(k) plans, profit-sharing plans and the like,’ he says.

“Also, distributions from employer-sponsored retirement plans such as Simple IRAs and Simplified Employee Pension Plans ‘don’t qualify,’ Mr. Hall says.

“Q: Is the maximum exclusion amount really $100,000 a year, or is it $100,000 over my lifetime?

“A: That $100,000 amount is the maximum annual amount, says Mr. Rosica of Ernst & Young. It isn’t a once-in-a-lifetime offer.

“Q: How does it work for married couples? Is the limit $100,000, or double that amount?

“A: You and your spouse each can exclude up to $100,000. That amount is the maximum per person, not the maximum for married couples. ‘However, each spouse must have his or her own account, and each spouse cannot make a qualified charitable distribution for more than $100,000,’ Mr. Hall says.

“Q: If I take advantage of this provision, can I deduct my transfer as a charitable donation?

“A: No. These charitable transfers are tax-free but not tax deductible.

“Q: So if you can’t deduct these transfers as charitable gifts, why is this law so popular?

“A: Many donors prize this provision because the transfer won’t inflate their income, thus helping them in several ways.

“Many tax deductions, credits, phase-outs and other numbers are tied to ‘adjusted gross income’ or certain other measures of income. Thus, by excluding qualified charitable transfers from income, this provision helps many people save money. For example, it may spare them from owing higher taxes on Social Security benefits and from having to pay higher Medicare premiums, as my colleague Laura Saunders pointed out in a column in The Wall Street Journal late last year.

“If these direct IRA charitable transfers weren’t excluded from income, taxpayers could get hit in other ways. Higher adjusted gross income ‘might make one more likely to be subject to the tax on net investment income,’ says Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. ‘It might increase the amount of the phaseout for many other deductions and credits. By keeping adjusted gross income lower by doing a direct IRA distribution to a charity, a taxpayer may increase the benefit of these other breaks.’

“Moreover, some donors can’t deduct their charitable donations anyway because they take the standard deduction, instead of itemizing. About two-thirds of all returns each year claim the standard deduction.”