Most desIRAble™ gifts

Gifts from IRA accounts: Q & A

How did this come about?

Congress recently passed "The Pension Protection Act of 2006." Included in that act were new provisions designed to increase contributions to charities while also requiring greater accountability on the part of some charitable organizations.

What does the IRA gift law provide?

Individuals who are at least age 70-1/2 may now make direct gifts from their traditional IRAs to charity without showing that gift as "income."

Is this new?

Yes. Previously you could not distribute from an IRA to charity without first declaring the withdrawn amounts as income.

Why must you be at least 70-1/2?

That is the age when the law says you must begin withdrawing from your IRA. There are formulas that determine the minimum amount you must withdraw each year.

May I give the minimum distribution amount to SJSU instead of withdrawing it for my personal use?

Yes.

I've already taken my required minimum distribution this year. Can I write a check for that amount and get the benefit?

No. Only direct gifts out of IRAs qualify for the special tax treatment.

What about other retirement plans such as my 401k or 403b plans?

No. Only IRAs qualify. You may want to talk to your tax advisor, though. In some cases, other retirement assets may be "rolled over" into an IRA. Then the distribution would likely qualify.

So, do I get to take a charitable deduction for the gift?

No you don't – and that's actually a good thing.

I don't get it. Normally when I make gifts, I get to take a charitable deduction on Schedule A. Why is this better?

We need to get a little technical here for a moment. The most important number on your entire 1040 form for tax purposes is labeled "adjusted gross income." It's the number on the bottom of the first page.

Most people think of this number as the starting point before taking deductions and exemptions, but it's more than that. If this number is too high, you may find: (1) that some of your deductions and exemptions are "phased out," (2) that some of your social security benefits are taxable, or (3) that you may owe the "alternative minimum tax."

So, the general rule is that you want to keep the adjusted gross income number as low as possible.

Let's get back to those required distributions from your IRA. The amount you withdraw each year gets put on line 15 and becomes part of your adjusted gross income. If you make a direct gift from your IRA to SJSU, the distribution never appears on your tax form.

I take the standard deduction because I don't have enough deductions to itemize. Does this help me too?

Yes. If you don't itemize, you probably aren't getting any financial benefit for your annual gifts to charity. Under the new rules, you can reduce your taxes without the need to itemize.

How long will this benefit last?

You may make distributions in 2006 and 2007. Then, the benefit is scheduled to expire.

Is there a maximum gift I can make from my IRA?

Yes. $100,000.

You mentioned that gifts to SJSU (such as through the Tower Foundation) qualify. May I use this for other charities as well?

In most cases yes, but there are important exceptions. You may not make distributions to a private foundation or into a "donor-advised fund." If, for example, you have a donor-advised fund with a community foundation, you will not be able to use an IRA distribution to increase that fund.

I have a charitable trust. May I use an IRA distribution to add to that?

No, nor may you use IRA distributions to fund a new charitable trust, charitable gift annuity or any other "split interest" giving vehicle.

I already have a named fund set up at SJSU. Is that considered to be a donor-advised fund?

No. We come under an exception to the rule because all distributions from our funds benefit only SJSU and its programs.

©August 2006

DISCLAIMER

The opinions expressed in this message are those of the author and do not necessarily reflect the views of San José State University. The statements apply to a general discussion of legal issues and do not constitute legal advice or a legal opinion. No attorney-client relationship is created by this message. Seek independent counsel to act upon any ideas presented in this message.

Circular 230 Notice

To ensure compliance with requirements imposed by the IRS, you are informed that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party to any transaction or matter addressed herein.

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