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On August 17, 2006, President Bush signed the Pension Protection Act of 2006 creating a new charitable planning opportunity.

An IRA owner age 70½ or older may make a direct transfer to charity. The transfer may be up to $100,000 in one year including 2006 and 2007.

Since the limit is for "a taxpayer," a husband and wife could each give up to $100,000 from two separate IRA accounts. Even in community property states, the $100,000 limit will apply to each account.

Often a great portion of IRAs go to estate taxes and income taxes of beneficiaries. Experts estimate heirs will receive less than 25% of most IRAs that pass through estates.

While Ohio is one of the few states that does not allow a state income tax deduction for charitable gifts, it must honor the new federal law.

This means Ohio donors can make a gift directly from their IRAs and avoid the state tax altogether. Until now, donors would have to report taxable income from their IRA without any offsetting tax deduction for a charitable gift. Now many Ohio donors can save up to 6% for each charitable IRA transfer in 2006 and 2007.

Permitted IRA Rollover Gifts
IRA Rollover gifts may be made to public charities. In most cases, IRA rollover gifts will be a transfer from a regular or Roth IRA to a public charity for the general purposes of that charity.

IRA Rollover Gifts Not Permitted:  There are a number of restrictions on the "qualified charitable distribution" The distribution cannot be made to a donor advised fund or to private foundations, with the exception of the conduit private foundation.

IRA Rollover Qualifies for RMD
Each year, IRA owners age 70½ and older must take a required minimum distribution (RMD). The RMD in nearly all cases is calculated using the Uniform Table. Under the Uniform Table, distributions generally commence at age 71 at approximately 3.8% and increase each year based on the age of the IRA owner.

Fortunately, the IRA charitable rollover will qualify for the donor's RMD. By transferring part or all of their RMD to charity, they will have a lower taxable income. This could both simplify their tax return and reduce income taxes.

Case1: The Social Security IRA Rollover Donor

Gary is retired with a substantial IRA. He has some retirement income from CDs and dividends from stocks. With his regular retirement income, his Social Security payments are taxable at 50%. However, Gary also has a large IRA. At age 78, the federal rules require a larger taxable IRA distribution each year.

Question:
With Gary's required distribution from his IRA increasing his taxable income, he knew that up to 85% of his Social Security payments would soon be taxable.

Gary was involved with a local charity and makes a gift each November to help those in need. Is there a better plan for Gary this year?

Solution:
Gary could give part of his required IRA payout to his favorite charity. By transferring a portion of his required distribution to charity, Gary is able to maintain a lower taxable income. With a lower income level, 50% rather than 85% of Gary's Social Security payments may be taxed.

Gary commented, "This IRA rollover is a great plan. I helped those in need through my favorite charity, and also lowered taxes on my Social Security payments. Since I already paid taxes on Social Security when I was working, this seems only fair to me!"

Bruce retired several years ago, but he wanted to be active during his retirement years. So Bruce started volunteering with an organization that helps needy young children. Bruce devotes several hours a week to his volunteer work and receives great satisfaction by helping young children in need.

Question:
Since Bruce lives fairly moderately and has a good income from his retirement plan and investments, he is a very generous donor. He feels that this is an opportunity for him to "give back" to society for the very good life he has been able to lead. But Bruce would like to do more.

Is there a way for Bruce to help even more?

Solution:
Bruce would like to help with a special campaign the charity is currently sponsoring for a new building.

Bruce was able to contact his IRA custodian and have a gift of $20,000 sent to the charity. The charity also included Bruce on a plaque that will be on the wall of the new building as one of the major supporters of the new center.

Bruce is very pleased with his gift. Although Bruce did not receive a deduction for his gift, the deduction of $20,000 from his IRA was not included in his taxable income.

Ralph was a retired investment advisor. He had watched his IRA blossom and grow through good investments. It now was the largest asset in his estate. Based on his age of 79 and the increased value, his required distribution this year was nearly $100,000!

Question:
Ralph was a frequent volunteer for his favorite charity and wanted to make a major gift to the organization establishing a permanent endowment in his family name.

In November, he decided that he did not actually need the distribution for this year. With the growth of his IRA, it was logical to make the gift from his IRA. But how can this work?

Is this a good tax planning strategy?

Solution:
Ralph contacted his CPA to discuss the best way to make his major gift. She explained the benefits of making a tax-free IRA charitable rollover in 2006. By not taking the $100,000 into his income, Ralph could benefit in three ways.

First, his personal exemption would not be phased out at the higher income level. Second, he would not lose the 2% of his itemized deductions at that level.

The next day, Ralph contacted his IRA custodian and had the full $100,000 IRA payout sent to favorite charity. He and his CPA were both delighted - Ralph made a wonderful gift and his tax situation was simplified.

Case 4: Teacher Mary and the IRA Rollover Lesson
Mary Smith is a retired teacher. When she retired, she was given the option to rollover her retirement plan into an IRA. Since she wanted to have control over the investment of the IRA, she decided to rollover her retirement plan into a self-directed IRA.

Mary recently turned 71. She volunteers regularly for favorite charity and makes a gift each year of $2,000. In order to make the gift, she must withdraw $2,000 from her IRA, report that amount as increased income, and then write a check to charity.

Question:
Mary heard about the new IRA rollover option.. Mary would merely need to contact her IRA custodian and have the gift transferred to her favorite charity. Is this IRA rollover gift possible?

Is it a good plan for Mary?

Solution:
Mary contacted the large financial company that managed her IRA. She asked that the financial company make a "qualified charitable distribution" to her favorite charity in the amount of $2,000. The financial company then transferred the $2,000 directly to the charity. The balance of her required minimum distribution was then distributed to Mary.

She reported the IRA distribution to her on her tax return, but did not report the $2,000 gift to charity.

Mary loved the simplicity of the IRA charitable rollover. The $2,000 did not get reported on her income tax form and she did not have to itemize to take the deduction. The simplicity and convenience of this gift was a wonderful benefit for Mary.