Last year, an act of Congress had an effect on your IRA and soon may expire. Following is a brief description of the law and how it affects charitable donations.

Special Legislation
Under the Pension Protection Act of 2006, individuals 70½ or older may be eligible to make a gift while you are living using funds from your IRA without incurring any undesirable tax effects. Prior to this new law, you would have to report any amount taken from your IRA as taxable income. You could then take a charitable deduction for the donation for the gift, but only up to 50% of your adjusted gross income. In effect, this caused some donors to pay more income taxes than if they didn’t make a gift at all. Fortunately, from now through December 31, 2007, these IRA donations can be accomplished simply and without tax complications. You can also make the donation while you are living and be able to witness the benefits of your generosity.

To be eligible for the special tax treatment under the Pension Protection Act, you must be at least 70½ years old on the day you make the donation. If you are younger than 70½, you can make a charitable gift from an IRA during your lifetime, but the gift creates income tax issues.

Congress may or may not vote to renew this legislation at the end of the year.

Charitable Bequests
An IRA can be one of the best assets to use for a charitable request. Although an inheritance is normally exempt from federal income tax, distributions from an inherited IRA are an exception and usually fully taxable. You may consider leaving the taxable IRA assets to a charitable organization so your family will receive more of the other income tax-free assets such as cash, stock and real estate.

Estate Taxes
The highest current estate tax rate is 45%; inherited IRAs are subject to an even higher tax rate since each withdrawal or distribution triggers taxable income to the beneficiary. A bequest of your IRA assets to a charitable organization avoids all estate and income taxes. First, your estate may claim a charitable estate tax deduction since the IRA is transferred to a charitable organization. Second, if you name the organization as a beneficiary on your IRA and the IRA is distributed directly to that organization after your death, then neither your estate nor your heirs will have to report any taxable income from the distribution.

Conclusion
These are complicated issues and no one should make any decision on IRAs and charitable contributions without the advice of a competent tax advisor. This is especially important since none of the above comments included any state tax considerations.

If you have any questions on these issues, please call me or Mike Peacock and we will try to answer your questions or direct you to someone who can.