2. Which donors stand to benefit most from giving their IRAs to charity?
Because charitable IRA transfers are not included in taxable income and not available for itemized charitable deductions, these special rules may benefit many different types of individuals:
·High-income earners—Donors who itemize deductions may find that they cannot take full advantage of their tax deductions. Often referred to as the 3 percent floor, a taxpayer must reduce itemized deductions by 3 percent of the amount by which the taxpayer’s adjusted gross income exceeds a certain amount that is adjusted annually for inflation (currently $150,500 or $75,250 each for married people filing separately). For the years 2006 and 2007, the reduction on itemized deductions for affected taxpayers is reduced by one-third.
Example: In the 2006 tax year, a married couple filing jointly has $1,000,000 in adjusted gross income (AGI). Because the couple’s AGI exceeded $150,500, the phase-out rules will apply to the couple’s itemized deductions. A complex formula shows that the couple’s itemized deductions will be reduced by $16,990 and, as a result, the couple can claim $133,010 in itemized deductions. Presuming the couple’s tax rate is 35 percent, the reduction in itemized deductions potentially results in additional taxes of approximately $5,945. (Note that this is a simplified example; please see your professional tax advisor for how it may affect you.)
·Generous donors—When making a major gift, some taxpayers may give more to charity than they can deduct that year. Donors cannot deduct more than 50 percent of their income for gifts of cash to public charities (30 percent, if giving to private foundations). Although amounts over 50 percent can be carried forward and deducted in future years, taxpayers will face an immediate tax bill and may lose some of the benefit of the deduction if they die before the gift has been fully deducted. Donors who consistently give above the limit will not be able to take advantage of the carry forward provisions.
·Non-itemizers—Donors who regularly give a portion of their income to charity are not able to enjoy a tax break from the contribution because the standard deduction is still greater than the total of all itemized deductions. This may be especially true if state and local income taxes are low.
·Financially comfortable—Individuals or couples who distribute the minimum from their IRA—and have other forms of income to pay living expenses—may find that transferring their minimum distributions to the community foundation helps fulfill personal charitable goals, tax-free.