ANOTHER YEAR-END TAX TIP

For 2011, taxpayers age 70½ and older can transfer up to $100,000.00 tax-free directly from an IRA account to a charity.  A charitable transfer can be used to satisfy the taxpayer's required minimum distribution for the tax year.

Ely Mosynary, age 72, must take a fully taxable required minimum distribution of $4,263 from his IRA.  Ely also made a pledge of $5,000 to the YMCA building fund.  Ely can request that $5,000 be sent directly from his IRA account to the YMCA to cover both his required minimum IRA distribution for 2011 and his outstanding pledge.  The $5,000 is not reported as income on his Form 1040, and it cannot be deducted as a charitable contribution on his Schedule A.

Without this technique Ely would have to report $4,263 as gross income on Page 1 of his Form 1040 and claim a $5,000 charitable deduction on Schedule A.  The $4,263 would increase his Adjusted Gross Income (AGI) and could, as a result, increase the taxable portion of his Social Security or Railroad Retirement benefits by as much as $3,624, reduce his medical and miscellaneous itemized deductions by up to $405, and reduce or eliminate a number of other deductions and credits that are affected by AGI.

Many retired taxpayers who must take required minimum distributions (RMD) from an IRA cannot itemize because of the additional standard deduction for age 65 or older and the fact that their mortgage is paid off, and therefore get no tax benefit from charitable contributions.  By using a direct transfer to a to satisfy their annual RMD they will be able to get the full tax benefit for their contribution, as well as possibly reducing their taxable Social Security.

Charitable transfers should only be made from a “traditional” IRA.  Qualified distributions from a ROTH IRA are totally tax-free, so there is no tax benefit in a direct transfer of funds from a ROTH IRA.  

Qualifying taxpayers may also want to consider making a direct transfer from a traditional IRA to a charity now, instead of having a cash bequest made from their estate.  Since your beneficiaries are taxed on monies received from an inherited traditional IRA, by making the contributions as a direct transfer you will -

* reduce the tax cost to the beneficiaries of their inheritance,

* reduce the balance in the traditional IRA, which will in turn reduce taxable required minimum distributions,

* get the money to the charity sooner,

* enjoy the appreciation of the charity during one’s lifetime, and

* see how the contribution is put to use.    

The direct tax-free transfer to a charity is not available from a SEP or a SIMPLE IRA.

Any questions?

TTFN