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Tax Tip for New York Residents--Using Your IRA for Charity

December 07, 2006

You may be aware of a provision of the Pension Protection Act of 2006 that allows individuals who are 70-1/2 or older to exclude from gross income distributions from IRAs of up to $100,000 a year when paid directly to a qualifying charity. Gifts to CRTs, donor-advised funds, supporting organizations, and private foundations are not qualified for this purpose, although contributions can be made to the Long Island Community Foundation for an unrestricted or field-of-interest fund. The contribution does not give rise to a charitable deduction, but excludes what otherwise would be taxable income. Because income tax deductions phase out at certain levels of income, the exclusion from income is more valuable to many individuals.

Under certain circumstances it may be better for a New York resident (especially a New York City resident) to take the distribution personally and then make the contribution to charity. The calculation of New York taxable income excludes the first $20,000 of retirement income for each spouse, without affecting the individual's deductions. Thus, if the taxpayer withdraws up to $20,000 from an IRA personally, and then makes an offsetting contribution to charity, the charitable deduction reduces New York taxable income, while the IRA withdrawal does not increase it. An additional benefit is that the corresponding contribution can be made to a donor-advised fund at The New York Community Trust; using appreciated securities is even more tax-efficient.

For example, a New York City married couple with adjusted gross income of $ 200,000 (including $40,000 of IRA income) will actually pay almost $4,000 more in New York income tax if each of their IRAs pays $20,000 directly to charity than if they withdraw the funds personally, then donate the proceeds, or securities of equal value. (For an average taxpayer with no medical or miscellaneous itemized deductions, the additional Federal tax is approximately $300.) Even taxpayers with AGI of $1 million realize tax savings, though the savings is not nearly as dramatic.

For some individuals, it may be the smarter choice to personally take $20,000 from the IRA and contribute it to charity, to take advantage of both the New York State exclusion from income and the charitable deduction. Others may also want to use the rollover provision to distribute up to $100,000 directly to an unrestricted or field-of-interest fund at the Long Island Community Foundation, or another charity.

According to preliminary figures over $25 million was contributed to charities in 2006 under this IRA rollover provision. Speak with your tax adviser to see if it works for you.