According to the April 4 Kiplinger Tax Letter, the opportunity to donate your IRA withdrawals to charity without tax affect will be reinstated retroactively to January 1, 2008. Congress allowed this benefit to expire at the end of 2007. This is good news for people who are taking their RMDs (required minimum distributions) and otherwise donate to charity.

At first blush, this may seem a silly notion. You take the IRA distribution into ordinary income and you deduct the charitable contribution, no harm/no foul.

But upon closer examination, this is a material benefit to hundreds of thousands of households. Here’s why:

When you withdraw from a normal IRA, the income goes into your AGI (Adjusted Gross Income). AGI triggers many limitations on deductions when it exceeds certain thresholds. Consequently, if you fall into this situation, you may only be able to deduct half, or perhaps none, of the charitable contribution.

More importantly is the opportunity to reduce the IRA. As noted in previous articles, these can be one of the tax costly assets to hold in a taxable estate. If lining up all the assets one holds, examining the tax characteristics of each, I can’t imagine a more inviting asset to donate for most people. Remember, the IRA does not get step-up at death like your capital assets do that are outside retirement accounts. Further, the tax burden, or contingent liability, grows with your IRA. As we face higher income tax rates, the after tax value of your IRA decreases. The amount given counts against your RMD.

Bottom line: take a hard look at the tax impact of using your IRA for charitable purposes, and once the rule is reinstated, go ahead and make your year end contributions from your IRA.

Posted in BIG Blog, Finances, Guidance