Decoding New Pension Law's Impact On Charitable Giving

? Contributions count toward the required minimum distribution for a donor's IRA accounts.

? If the IRA has any basis, the contribution is deemed to come first from the taxable portion. If any portion is non-taxable, the individual can count that amount as a charitable contribution and take it as an itemized deduction.

? The entire payment must be made as a charitable contribution. If the donor receives a benefit (for example, a $5,000 donation to attend a dinner where the cost of the dinner is $75), none of this payment qualifies.

? Gifts from retirement accounts other than IRAs (for example, 401(k) or SEP accounts) are not eligible.

? Eligible recipient charities generally include all public charities, though the law expressly excludes donor-advised funds, charitable remainder trusts and supporting organizations.

Who benefits?

While the provision affecting charitable giving is short-lived, the change in the law is most likely to benefit those individuals who:

? Don't itemize, since, under the old law, they would have included the distribution income without any deduction; under the new law, they do not include the amount in income.

? Do itemize, because the income exclusion keeps their adjusted gross income lower, which translates to a potential increase in itemized deductions and personal exemptions if they are phased out and a lower floor for medical expenses (7.5% of adjusted gross income), non-business casualty losses (10%) and miscellaneous expenses (2%).

? Don't need their required minimum distribution. This change lowers their tax liability and the charitable contributions lower the account value, which in turn reduces future required minimum distributions.

? Receive Social Security benefits. It may help to keep income low enough to decrease or eliminate the portion of Social Security benefits subject to income tax.

? Live in states without state charitable deductions. This will lower individuals' taxable income while still allowing them to make charitable contributions.

? Make charitable gifts greater than the 50% adjusted gross income limitation. A charitable IRA Rollover will garner a tax benefit without being subject to this limitation.

Clearly, the Pension Protection Act of 2006 provides new opportunities in charitable giving. However, other types of charitable gifts may provide your client with better tax benefits. In any discussion of depth on these issues, it's prudent to include experts in the conversation. Your client will appreciate it.