In August 2006, President George W. Bush signed into law the Pension Protection Act of 2006, which has been kept a dark secret in spite of a win-win provision for charitable organizations and some taxpayers buried in it.
Hidden in the 383 pages of legalese is “Title XII: Provisions Relating to Exempt Organizations” with “Subtitle A: Charitable Giving Incentives.” Only upon reading these three words written in simple English did I, a licensed attorney and CPA with a master’s degree, begin to comprehend what may be a win-win situation.
Section 1201, titled “Tax-Free Distributions From Individual Retirement Plans for Charitable Purposes,” further piqued my interest to read more, seeking tax savings possibilities. I knew that individual retirement accounts (IRAs) were a tax-deferral law, but not a tax-free law. Uncle Sam wants his pound of flesh when you draw money out of IRAs, either voluntarily after age 59 and a half or mandatorily after age 70 and a half, and these funds must be includible (100 percent) as taxable income on Form 1040. These IRA funds were created to work with 100-percent before-tax money (tax-deferred), and then you have to pay the piper upon withdrawal.
Under this new law, taxpayers can avoid income tax on IRA funds in their entirety if they follow the provisions of the Pension Provision Act of 2006. To qualify for this exclusion:
1. You must be age 70 and a half or older.
2. You must donate the IRA funds to a section 501(c)(3) charitable organization.
3. Donations excluded from your taxable income are limited to $100,000.
4. Donations must be distributed directly from your IRA fund administrator to the charitable organizations of your choice.
5. Donations must be made after August 2006, the date President Bush signed the bill, and before Dec. 31, 2007.
This new law may be of great benefit to you if you fall into the class of taxpayers listed above . You will be able to exclude permanently any income tax (up to $100,000) on your IRA funds, while at the same time benefiting the charity of your choice. I call this a win-win law, and I agree with the drafters who called it a “Charitable Giving Incentive.”
By being able to exclude your IRA funds from taxable income, other possible benefits of this law include: exclusion of having to pay tax on your social security benefits; avoiding having to phase out your Schedule A itemized deductions or personal exemptions; avoiding the dreaded alternative minimum tax; and restrictions on your passive loss deductions.
The best way to evaluate whether this new law is right for you is to run the numbers with the help of your CPA or by using tax preparation and planning software available on the market.
Now that you know of this secret provision of the Pension Protection Act of 2006, you have the tools to avoid paying unnecessary income tax for 2007.
Harry W. Tong is an attorney in Foster City, Calif.