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IRA Tax Exemption Law Benefits Elderly and Charities

The IRS tax code contains many different tax exemptions and ways for people to minimize their tax liabilities. Some of these provisions have been with us forever, and will likely never change significantly. But some come and go, depending on the economy, or the mood of congress. One popular tax break, which benefits the elderly and charities, looks like it’s back again.

Money Given to Charities May Not Be Taxable

The tax break relates to the ability to transfer money from an IRA to a charitable organization. People who are older than 70 ½ were once able to transfer as much as $100,000 every year tax-free to a charitable organization. That rule went away, but has now returned.

Payment or donation from an IRA to a charity is deducted from the taxpayer’s income calculation for tax purposes. But the money has to go directly from an IRA to the charity—it can’t go to you or anyone else as a middle man. Profit sharing plans, or 401(k)s also don’t qualify—it must be an IRA.

Tax Deductible vs. Tax Free

The charitable contribution is not tax deductible—it’s tax free. That means you don’t have to count it as income for the purpose of determining your income taxes. And because the money donated is deducted from your income, any need-based or income-based programs won’t be affected by the income. For example, for calculation of Medicare premiums, the contribution amount would be subtracted from your income in determining what your premium is.

The money also can be used to qualify for the minimum distribution that may have to be made from an IRA. The law requires that those 70 ½ or older must withdraw sums from an IRA annually. Normally, that amount is considered income. But by donating to a charity from the IRA, you can both satisfy the distribution requirement, without impacting income.

And although it’s not tax deductible, that may not matter. For those who use standard and not itemized deductions, they wouldn’t get the benefit of the tax deduction anyway. A tax free donation, such as this one, is much more helpful.

Work With Reputable Charities

Most reputable and larger charities have procedures to accept such donations. Make sure your donation is being made to the correct charity name. The charity will have to acknowledge the donation, but most major organizations are well equipped to provide you this information.

The law, which expired late 2014, is now back, and it’s retroactive to early 2015. So if you’ve made a charitable contribution from an IRA, or have an IRA and are looking for ways to reduce your tax liability while also doing good in the world, now may be a good time to start planning.

The law has many tools to maximize your assets and minimize your taxes that you may not even be aware of. Contact Tampa business, asset and probate attorney David Toback to discuss a comprehensive tax and estate plan.

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