In 2007, there was a neat charitable tax planning maneuver that could be done with funds in your IRA. If you were over age 70½ and therefore required to take a minimum annual distribution from your IRA, you could instead have all or a portion of that required distribution sent directly to a charity. This provision expired at the end of 2007, so it is not available in 2008-but it might be.

In May of 2008, the House passed H.R. 6049, the "Energy and Tax Extenders Act of 2008," which, among other things, extended the ability to make this charitable distribution for 2008. Unfortunately, the Senate has yet to act upon this legislation, so taxpayers are forced to either ignore this legislation or to go ahead and assume it will be passed, and plan accordingly.

Let's examine why the ability to make charitable donations from your IRA is valuable for a taxpayer.

If you are currently 70½ or older and taking required distributions and you are also making charitable donations, you are reporting the distributions as taxable income, but are also claiming an itemized deduction for the charitable donation. If you make the charitable donation directly from your IRA, you don't report the donation as taxable income, but neither are you able to claim the donation as a charitable deduction. Therefore, it sounds like one of these "six of one and half-dozen of another" arguments, with the income and deduction offsetting each other-but it doesn't really work out that way. Funny how taxes never seem to work out quite like you think.

When you report an IRA distribution as income, it impacts certain other tax calculations. First of all, it may increase the amount of your Social Security income that must be reported. Social Security income may be tax-free or partially taxable, depending on your overall income, so by increasing your income you are raising the likelihood of your Social Security income being taxed.

Second, you can claim medical deductions and miscellaneous itemized deductions only to the extent they exceed 7½% and 2%, respectively, of your adjusted gross income. Therefore, since a taxable IRA distribution increases your adjusted gross income, it shaves off some of those deductions.

Thirdly, your overall itemized deductions are reduced as your adjusted gross income hits certain thresholds, which further reduces the benefit of being able to claim the charitable deduction.

Finally, for many people, they are not even claiming an itemized deduction. For 2008, the standard deduction for a married couple, assuming both spouses are over 65, is $13,000. If your home mortgage balance is low or paid off, you may not have enough other itemized deductions to exceed the standard deduction. In that situation, there are no taxes saved by being able to claim a charitable deduction.

So, the charitable IRA distribution sounds like a good strategy, but what should you do with the legislation hanging in limbo?

My advice is to go ahead and do the charitable distribution-and be quick about it-there are only a few months left in 2008. If you do make a charitable distribution and the tax extender law passes, you'll feel really smart and be dollars ahead. However, even if the law does not pass, you would be no worse off than you were before. In that event you would just be reporting your required IRA distribution as taxable income and then claiming a charitable deduction.

So, if you are over 70½, don't hesitate, go ahead and jump.


Gerald A. Townsend, CPA/PFS, CFP®, CFA® is president of Townsend Asset Managment Corp., a registered investment advisory firm. Email: Gerald@AssetMgr.com.