University of Wisconsin - Extension

MADISON, Wis. — Here’s some exciting news that can help you plan a tax-effective strategy for your IRA distributions in 2007 while you support our favorite charity, but time is of the essence! For the tax year of 2007, taxpayers over the age of 70-1/2 years may donate up to $100,000 per year from an IRA to a charity or non-profit organization without having the distribution count as taxable income on their federal income tax return.

The Pension Protection Act of 2006 provided a one-step option to make a charitable contribution directly from your IRA to a non-profit organization in 2006 or 2007 with no tax consequences. Many charities and non-profit organizations can accept such gifts, says Karen Goebel, UW-Madison/Extension Family and Consumer Economics Specialist.

Wisconsin does not follow this federal tax provision. Therefore, on their Wisconsin tax return, taxpayers must report the withdrawal from their IRA as income and the charitable contribution as an itemized deduction. If the charitable contribution exceeds 30 percent of the taxpayer’s modified adjusted gross income, the excess cannot be deducted in the year of the contribution but can be carried over to the next five tax years. The carry over can be deducted in those years subject to the 30 percent of modified adjusted gross income limit.

And there’s more good news: According to Goebel, your IRA charitable distribution will satisfy all or part of your required minimum IRA distribution for 2007. So you can use your IRA to make your charitable gifts and avoid tax on your required IRA distribution. Some restrictions do apply:

• You must be 70-1/2 years of age.
• Tax benefits apply for gifts up to $100,000 per person in 2006 and 2007.
• You can make these IRA charitable distributions in 2006 and 2007 only.
• You must instruct your IRA account administrator to make the distribution directly to the charity or non-profit.
• Only outright charitable gifts can be made (not life-income gifts such as charitable gift annuities).
• Your gift must be made to a public charity such as the WAFCS Foundation (not to donor-advised funds or private foundations).

How to make the tax-free gift

The Pension Protection Act provides that eligible IRA owners may obtain the tax advantages of making charitable distributions if the payments are made directly from the IRA account itself. You must instruct your IRA administrator to make a direct distribution to the charity or organization of your choice. Contact your IRA administrator to find out if they have a form you must use.

When instructing your IRA administrator to make a charitable distribution:

• Instruct the administrator to send the distribution check to the address of the charity or organization you have chosen to give to.
• Instruct the administrator to identify you as the IRA account owner/donor by name and address on its cover letter.

Remember to inform the charity or organization that you are making an IRA charitable distribution.

For more information about saving strategies and family financial management, contact your county UW-Extension office.

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File: Consumer Issues, Family Financial Management