In August, the U.S. Senate passed the Pension Protection Act of 2006 (PPA 2006), which includes a provision for IRA rollovers to charity made during a donor’s life. The IRA rollover provision allows otherwise taxable distributions of up to $100,000 from a traditional individual retirement account (IRA) or a Roth IRA to be excluded from gross income.

How does the IRA rollover differ from past tax treatment? Prior to PPA 2006, a donor had to report a withdrawal from an IRA as income and then declare an off-setting income tax deduction for the charitable contribution. The effect was an increase to income and then the declaration of a deduction with the net effect of increased taxes for many donors.

The new legislation offers an incentive to donors who want to use the money in their IRAs to make charitable gifts. The legislation makes the process simple and assures these donors that their gifts will not increase their taxes.

Donors to whom the new IRA rollover likely will appeal include: 

• Donors already giving at their 50 percent deduction limit
• Donors whose income level causes the phase out of their exemptions
• Donors who don’t itemize their deductions
• Donors for whom additional income will cause more of their Social Security income to be taxed

To qualify for IRA rollover treatment, the donor must direct the IRA manager to transfer funds directly to charity. A withdrawal followed by a contribution will still have to be reported as income. The donor must be at least age 70½ and the receiving organization must be a tax-exempt organization to which deductible contributions can be made. Donor-advised funds and supporting organizations are not eligible. The gift must be outright; rollovers to a planned gift, such as a gift annuity or a charitable remainder trust, do not qualify. Outright distributions to charity from employer-sponsored retirement plans — such as Simple IRAs, 401(k)s, and 403(b)s — do not qualify as well.

Also, note that IRA rollovers may be includable in a donor’s income for state and local tax purposes and may not earn an offsetting charitable deduction, depending on state and local law. This provision is effective only through Dec. 31, 2007.

For more information, contact the Crozer-Chester Foundation at (610) 447-6311 or contact your tax adviser.