Late last year the president signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act. One of its important provisions reinstated for 2011 the option for direct distribution of funds from IRAs to qualified charities. This applies to investors over 70 1/2 who are taking their required minimum distributions.
In the past, if you were older than 70 1/2 and planning a charitable donation, you would have to first recognize your RMD (required minimum distribution) as taxable income. The money could then be used to make your contribution. The contribution would be shown on your tax return as a charitable deduction, part of your itemized deductions and subject to any limitations that apply. Your alternative would be to gift appreciated stock or other assets directly to your chosen charity, avoiding capital gains tax and taking the current value of the asset as a charitable deduction.
The reinstated law (at this time only for 2011) allows you to request your IRA custodian send all or a portion of your RMD directly to a qualified charity. The amount sent to the charity is not counted as taxable income, and no charitable deduction would apply. This special distribution to charity is limited to $100,000; if your required distribution is over that amount, you may only exclude $100,000 from your income when gifting directly from your IRA. The donation must be made at your instruction from the IRA custodian to the charity; you should not take receipt of the distribution first.
Should you take advantage of this in 2011? Well, your CPA can help you determine whether a donation of cash, a direct IRA gift, or a gift of appreciated assets is your best option. The direct IRA gift makes particular sense for those who do not itemize and would be unable to use the charitable deduction. It also may make sense for those planning to make a substantial donation this year.
Community foundations across the country have proven especially valuable to both large and small investors who wish to make their charitable donations in the context of a comprehensive plan, and in many cases focus on programs that are local in their intent and impact. The Community Foundation of the Low Country, which was established on Hilton Head in 1994, provides donors with many different types of charitable funds and endowments, often addressing local concerns. For information, contact Emmy B. Rooney, vice president for development and donor services, at 843-681-9100 or go to their website at www.cf-lowcountry.org.
Remember that the rules regarding charitable contributions can be somewhat complicated; consult with your tax professional to determine your best strategy.
Steven Weber is a Registered Investment Advisor and Director of Investments for the Bedminster Group. The Bedminster Group provides fee-only investment, estate and financial planning services. The information herein was obtained from sources considered reliable, and does not constitute tax advice. Their accuracy cannot be guaranteed. The opinions expressed are solely those of the author.