Michael Smith, director of the Sequim Senior Activity Center, says there is good news in the new tax law passed by Congress and signed Dec. 17 by President Obama. The law, the source of a national debate because it extends the so-called “Bush tax cuts,” also includes a tax-smart way to give to a favorite charity.
Specifically the new law re-establishes the ability of those who have a traditional individual retirement account — an IRA — to donate directly to a charitable organization while avoiding the taxman. The same program was in place from 2007-2009 but wasn’t available in 2010 until the new law was signed.
Smith explained that IRAs are designed to provide tax-deferred savings by establishing that the portion of your salary you put into the IRA is untaxed and remains that way until you withdraw it.
The new law says if you’re 70 years and six months or older and you donate up to $100,000 directly from your IRA account to a charitable organization, the funds won’t be taxed. Churches and 501(c)(3) organizations are among the eligible recipients.
Smith notes that under federal law, at the age of 70 and six months, those holding IRAs must begin taking annual withdrawals, at which point the funds are taxed. But Smith said those “of a charitable bent” can avoid paying taxes on money withdrawn from their IRA by taking advantage of the new rules. Rather than withdrawing their required minimum distribution (RMD), IRA holders can donate the same amount of money to a favorite charity and avoid paying taxes on those funds.
If they so choose, IRA holders can give more than their RMD. The new law allows IRA holders to give their favorite charities up to $100,000 in 2010 and another $100,000 in 2011.
The most important point to remember, says Smith, is that the funds must be transferred directly from the IRA to the charity of choice. This transfer is accomplished by the custodian of the IRA at the direction of the IRA holder.
The new law extends the 2010 donation period through January 2011.
It’s also important to note that while the money donated in this manner isn’t taxed, “double dipping” is not allowed. Those who give can’t write off the funds on their tax filing as a charitable donation — after all, they never had the funds in their possession.
Smith says those who would like to take advantage of the new program should consult with a professional tax consultant before making any decisions.