Donating an IRA as a Year-End Tax Strategy

William Perez for About.com writes:  Individuals have the option to donate funds from their individual retirement to charity. This is a special tax break called a Qualified Charitable Distribution, and this provision expires at the end of 2013. Here's how it works.

A qualified charitable distribution is a distribution of funds from an individual retirement account (IRA) directly to a 501(c)(3) charitable organization. Individuals age 70.5 years old or older are permitted to make such distributions. The distribution occurs by being directly transferred to the charity from the IRA trustee.

What's the tax benefit? Qualified charitable distributions from an IRA are not included in the taxpayer's taxable income, and the taxpayer does not take a deduction for the charitable donation. Up to $100,000 per year may be treated as a tax-free qualified charitable distribution. Further, qualified charitable distributions satisfy the required minimum distribution rules.

Qualified charitable distributions are a tax-efficient way for higher-income seniors to donate to charity. Since the income from the distribution doesn't show up on the tax return, this keeps total income and adjusted gross income lower than they would be if a normal distribution were taken and the cash subsequently donated to charity. By keeping total income lower, this can prevent a higher portion of Social Security benefits being included in taxable income. And by keeping adjusted gross income lower, this can help manage AGI-sensitive thresholds for the medical expense deduction and for the 3.8% net investment income tax.