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Articles of Interest

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IRS explains how individuals age 701/2 and older can make nontaxable transfers from IRAs to charity
Notice 2007-7, 2007-5 IRB; IR 2007-7
IRS has explained how age 70 1/2 and older individuals can make nontaxable transfers from IRAs to charities under Code Sec. 408(d)(8). This Pension Protection Act of 2006 (PPA, P.L. 109-280) provision applies only for transfers made in 2006 and 2007.

Source: Federal Taxes Weekly Alert (preview) 01/18/2007, Volume 53, No. 03

RIA observation: IRS's interpretation of the nontaxable transfer provision is liberal. For example, it permits each spouse to make an up-to-$100,000 tax-free transfer, and allows the IRA owner to hand-deliver a check from the IRA made out to the charity. It also permits otherwise qualifying IRA beneficiaries to make the nontaxable rollover.

New charitable giving option. For distributions in tax years beginning in 2006 and 2007, an up-to-$100,000 annual exclusion from gross income is available for otherwise taxable IRA distributions that are qualified charitable distributions, as defined below. (Code Sec. 408(d)(8)) An excluded distribution can't be deducted as a charitable contribution. (Code Sec. 408(d)(8)(E))

RIA observation: Qualified charitable distributions aren't subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer's return. Because such a distribution is not includible in gross income, it will not increase AGI for purposes of the phaseout of itemized deductions, personal exemptions, or any other deduction, exclusion, or tax credit that is limited or lost completely when AGI reaches certain specified levels.

A qualified charitable distribution is one made from an individual retirement plan (other than a SEP or SIMPLE IRA) on or after the date that the IRA owner attains age 701/2 directly by the IRA trustee to a Code Sec. 170(b)(1)(A) charitable organization (other than a Code Sec. 509(a)(3) organization or a donor advised fund (as defined in Code Sec. 4966(d)(2)). Also, to be excludible, the distribution must otherwise be entirely deductible as a charitable contribution under Code Sec. 170 without regard to the charitable deduction percentage limits. (Code Sec. 408(d)(8)(B), Code Sec. 408(d)(8)(C))

RIA observation: Thus, if the deductible amount is reduced because of a benefit received in exchange, or if a deduction is not allowable because the donor did not obtain sufficient substantiation, the exclusion is not available for any part of the IRA distribution.

If the IRA owner has any IRA with nondeductible contributions, the distribution is treated as consisting of income first, up to the aggregate amount that would be includible in gross income if the aggregate balance of all IRAs having the same owner were distributed during the same year. The annuity rules of Code Sec. 72 under which a pro rata part of the distribution would be treated as made out of nondeductible contributions don't apply. However, proper adjustments must be made in applying the Code Sec. 72 annuity rules to other distributions made in the tax year and later tax years to reflect the amount treated as a qualified charitable distribution under this special rule. (Code Sec. 408(d)(8)(D))
Although a direct distribution from an IRA to a charity is not included in the taxpayer's gross income, it is taken into account in determining his required minimum distribution (RMD) for the year. Thus, if the amount distributed directly from the IRA to an eligible charity at least equals the amount of the owner's RMD for the tax year, he will not be required to take any other distribution from the IRA for that tax year. (Joint Committee on Taxation Report on the PPA, JCX-38-06)

Here's how IRS interprets the new nontaxable transfer-to-charity option.
Eligibility for nontaxable transfer to charity. The nontaxable transfer to charity is available not only to IRA owners, but to their beneficiaries as well. The beneficiary must make the transfer after he has attained age 701/2. (Notice 2007-7, Q&A 37)

$100,000 limit. The income exclusion for qualified charitable distributions only applies to the extent that the aggregate amount of qualified charitable distributions made during any tax year with respect to an IRA owner does not exceed $100,000. Thus, if an IRA owner has multiple IRAs, and makes qualified charitable distributions from more than one of them, he may exclude a maximum of $100,000 for that year. For married individuals filing a joint return, the limit is $100,000 per spouse. (Notice 2007-7, Q&A 34)

Eligible IRAs. IRS says that generally, the exclusion for qualified charitable distributions is available for distributions from any type of IRA (including a Code Sec. 408A Roth IRA and a Code Sec. 408(q) deemed IRA). However, the IRA can't be an “ongoing SEP IRA” or an “ongoing SIMPLE IRA.” A SEP IRA or a SIMPLE IRA is treated as “ongoing” if it is maintained under an employer arrangement under which an employer contribution is made for the plan year ending with or within the IRA owner's tax year in which the charitable contributions would be made. (Notice 2007-7, Q&A 36)

RIA observation: In other words, IRS says that if a SEP or SIMPLE IRA account owner retired before 2006 (and didn't get an employer contribution after 2005), he may make a nontaxable distribution in 2006 or 2007 from the IRA to a charity if he meets all the necessary conditions (e.g., he has attained age 701/2).

Direct payment to charity. Code Sec. 408(d)(8)(A)(B)(i) provides that to qualify as a nontaxable distribution, a transfer must be made directly by the IRA trustee to an eligible charitable organization. IRS says that if a check from an IRA made payable to an eligible charitable organization is delivered by the IRA owner to the organization, the payment is treated as a direct payment by the IRA trustee to the charitable organization for purposes of Code Sec. 408(d)(8)(A)(B)(i).

Transfer not a prohibited transaction. Notice 2007-7, Q&A 44 says a qualifying transfer from an IRA to a Code Sec. 170(b)(1)(A) charity won't be treated as a prohibited transaction under Code Sec. 4975 , even if the individual for whose benefit the IRA is maintained had an outstanding pledge to the receiving charitable organization.

RIA Research References: FTC 2d/FIN H-12253.2; United States Tax Reporter 4084.03; TG 8913.1.