A provision expiring at the end of 2007 allows taxpayers age 70-½ and
older to have their IRA trustees make direct transfers of IRA funds (up to $100,000) to a qualified charity. The distribution is not treated as income
on the donor’s tax return, but no charitable deduction is taken for the
transfer. The distribution to the charity counts toward the year’s required minimum IRA distribution amount. At first glance, this does not seem all that
big of a deal. However, for someone whose contributions allow them to marginally itemize–or who don’t itemize–this can be a big benefit since their income (AGI) is lower without the IRA distribution. This may lead to reduced tax on Social Security income, marginal tax rates, capital gains rates and phase-out limitations, all leading to a lower tax for the year. Here is how a taxpayer can benefit from this new provision:

o By making a contribution directly from the IRA, a taxpayer is able to exclude the amount he or she contributed from his or her income for the year, which is essentially the same as deducting the contribution without itemizing deductions.

o This technique also lowers a taxpayer’s adjusted gross income (AGI) for other tax breaks pegged at various AGI levels, such as medical expenses, passive losses, etc., allowing them greater benefits from the AGI limited deductions.

o For taxpayers receiving Social Security (SS), the taxability of the SS is also based on income. Thus, excluding the portion of the IRA distribution directly distributed to the charity can reduce the taxable portion of the SS.

o Taxpayers who wish to make vary large contributions (up to the $100,000 limit) can do so with IRA funds that would have otherwise been taxable to them.

Example: Retired couple (both over 70½) file a joint return. Their income consists primarily of required minimum distributions from their IRA accounts totaling $35,500, their SS benefits totaling $28,000, and $2,000 of investment income. They are very active with their church and make a $14,000 contribution each year. They have no other income or deductions. Compare the 2006 results with and without a qualified charitable distribution:

In this example, instead of making a charitable contribution, the taxpayer made a qualified charitable distribution of $14,000, lowering their AGI, reducing their taxable SS and then using the standard deduction. Result: Tax savings of $2,901.