The tax law changes of December 2010 resurrected a provision allowing IRA account owners over the age of 70½ to send distributions from their IRA directly to a public charity tax free. This option remains in place through the end of 2011, and has been an attractive alternative for retirees wishing to avoid taxes upon taking required minimum distributions (RMDs). This also represents a much more tax–efficient method of satisfying charitable intentions for many investors who write checks to their favorite charities.

Here are four main reasons why the IRA charitable rollover can be a more tax–efficient alternative than claiming a tax deduction on the 1040 form:

  • Generally, in order to claim a charitable deduction, you must itemize on your tax return. For retirees who no longer pay mortgage interest, the deductions may be too small to itemize. The provision offers the tax benefits of a charitable contribution without your having to itemize your deductions.
  • Charitable deductions are limited by a taxpayer’s income — generally up to a maximum of 50% of modified adjusted gross income. By directing your IRA distribution to a charity, you can avoid this restriction.
  • If reporting additional income (from required minimum distributions) on Form 1040 increases your Medicare Part B premiums or negatively affects the taxability of your Social Security benefits, then directing the RMD from the IRA tax free to a charity may be appropriate.
  • Some states do not allow residents to deduct a charitable contribution. Making a donation to a charity directly from an IRA may provide a way to effectively claim a state tax deduction. Consult a tax professional for state–specific guidance.

As a reminder, account owners can direct up to $100,000 this year out of their IRA tax free to a charity and may include RMDs. Distributions must be made to qualifying charities; private foundations and donor–advised funds are not eligible. And lastly, the IRA trustee or custodian must make the distribution directly to the charity.

For more information, download our Donating IRA Asset to a Charity investor education piece.