Tax Tip of the Week
November 20, 2006

It offers the chance to donate to charity and reduce taxes at the same time. But like many good deals, it’s a limited time offer. You have only this year and next to take advantage of it.

If you’re age 70½ or older, the new law allows you to donate money directly from your IRA to a charity without paying the usual tax on the IRA withdrawal. You can give up to $100,000 each year, but only for 2006 and 2007.

Be aware of the following tax implications:

• You’ll escape tax on the IRA withdrawal, which is usually taxed as ordinary income.
• If you itemize, you won’t be able to claim a deduction for any amount that would otherwise have been taxable. If you don’t itemize, however, you can still claim the full standard deduction.
• Your donation counts towards the minimum annual withdrawals that you’re required to take after age 70½ (from traditional IRAs).
• Unlike a regular IRA withdrawal, distributions going to charity won’t be included in income. That keeps your reported gross income lower and may qualify you for other income-based tax breaks.
• You can’t make a donation directly from a 401(k) plan. However, you may be able to roll the 401(k) plan into an IRA and then make donations from there.
• The money must go directly from the IRA trustee to the charity. If you take possession of it first, you’ll lose the tax benefit.

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