Tax Break for IRA Gifts Expires Soon / Provision Applies to Those 70½ and Older

ANNE TERGESEN for the wall st journal writes: Time is running out for a popular tax provision that allows owners of individual retirement accounts who are 70½ or older to save on taxes when donating to charity.

The provision, which expires Dec. 31 (though Congress could reauthorize it), allows individuals ages 70½ or older to donate up to $100,000 of IRA assets to charity without reporting the withdrawal as taxable income. By reducing taxable income, the provision can help retirees avoid or reduce a host of taxes and penalties—including many tax increases that took effect this year. It can also count toward the annual required minimum distribution that people 70½ or older must take from a traditional IRA.

Those who are charitably inclined are likely to fare better with the charitable IRA rollover provision than they would by withdrawing money from their IRAs, paying income taxes, and writing checks to charity, says Ed Slott, an IRA expert in Rockville Centre, N.Y.

Consider what would happen with a $10,000 gift to your alma mater. If you don't itemize your deductions, you would normally receive no tax break for the gift. But under the charitable IRA rollover provision, the $10,000 won't be included in your income. Assuming you are in the 25% tax bracket, that would save you $2,500.

If you itemize, you won't receive a deduction. But the $10,000 IRA withdrawal won't inflate your taxable income, either. That may help you keep your adjusted gross income below the thresholds at which you would lose some of your deductions and other tax benefits.

For example, individuals with more than $200,000 of adjusted gross income and couples with more than $250,000 are subject to the new 3.8% tax on net investment income. Individuals with AGI above $250,000 and couples above $300,000 now start losing personal exemptions and itemized deductions. As income rises, you can also lose deductions for medical expenses, casualty losses and miscellaneous itemized deductions.

The rollover provision can also help taxpayers avoid or reduce taxes on Social Security benefits and avoid higher Medicare Parts B and D premiums, which kick in when adjusted gross income exceeds $85,000 for individuals and $170,000 for couples. To take advantage of the provision, you must be 70½ or older on the day you make the gift. Instruct your IRA custodian to directly transfer the money by Dec. 31 to a qualified charity.

Private foundations, donor-advised funds and supporting organizations are not qualified charities, says Conrad Teitell, an attorney at Cummings & Lockwood in Stamford, Conn. The charity must acknowledge the gift in writing, and you cannot receive anything in return.

Some prefer to donate appreciated securities from outside their IRAs to take a deduction for the fair-market value while avoiding the capital-gains tax. To see which approach benefits you more, do the math, says Mr. Teitell.

Congress has reinstated the IRA charitable rollover provision three times before, each time for two years. Some are betting lawmakers will resurrect it again in 2014.