December 26, 2013

If you want to donate to a worthy cause this year and have retirement money available to do so, you might be able to make the experience even more satisfying by legally dodging taxes

Thanks to the American Taxpayer Relief Act of 2012, individuals over 70 ½ years old can donate up to $100,000 from their retirement plan (a traditional or Roth IRA)  now until December 31st without paying the taxes you would normally have to pay with such a transaction.

Give and avoid taxes

“This gifting opportunity provides a tax-free way to give money to a near and dear cause,” says Gregg R. Wind, CPA, a partner in Wind & Stern LLP. “Taxpayers who are 70 ½ or older can give away as much as $100,000 from their IRA to an eligible charity, without having to include any of the transfer in their gross taxable income,” he says. 

This means that you won’t pay any taxes, your tax bracket will not be affected, you don’t have to itemize the deduction on your tax return and additional tax will not be incurred on your Social Security income. (Conversely, it also means that you can’t write the deduction off on your income taxes.)

Substantial tax savings

The tax savings you can enjoy by taking advantage of this incentive can be considerable, says Wind. “Tax rates go up to 39.6 percent, depending on a variety of factors, and then there are other taxes to consider, such as state taxes, which can often push the tax percentage to 50 percent. This means that your $100,000 donation could turn into about $50,000, whereas taking advantage of this tax relief opportunity would mean gifting the entire $100,000 to the charity.”

Considering that retirees over the age of 70 ½ must begin taking minimum distributions each year, this incentive can be particularly beneficial on a number of levels, says Wind. “If you don’t need the minimum distribution, this gives you a chance to donate the money where it’s needed, as the amount you give counts toward your minimum required distribution.”


The donation must be made directly from the IRA to the charitable organization, says Wind. “You can’t cash out your IRA and write a check. And it must be from an IRA, not a 401K. If you want to donate money from a 401K, you can roll it over into an IRA and then the donation must be made directly from the IRA.”

Eligible organizations for receiving your nontaxable IRA funds are those with a 501(c)(3) designation, which includes many charities, nonprofits, religious organizations and most private and public colleges and universities.

“Many people are loyal to their Alma mater and are glad to donate as a way of thanking the school for helping them be successful, so schools are a popular choice for donations,” says Wind, who suggests checking on the organization you are considering donating to on, which lists recognized registered charities and provides pertinent information.

Act now

This tax incentive has been around since the Pension Protection Act of 2006, but has expired a few times, including at the end of 2011. At that time, it was extended to the end of this year as part of the fiscal cliff agreement. Currently, there is no sign of the incentive being resurrected, so it’s important to act fast. 

“This is an expiring provision at the end of this year, so if you want the satisfaction of helping a worthy cause and saving on taxes, you’ll have to move quickly before the opportunity is gone,” advises Wind. “The window to help support charities on a tax-free basis will be closing soon.”

Photo: Enewsspot