Charitable Contributions From Your IRA – 2010 and Beyond

We discussed the IRA Charitable Contribution option some time ago in the post “Last Chance for Charitable Contributions from Your IRA”, and it’s possible from that article that you got the impression that you are no longer able to make charitable contributions with money from your IRA.  Nothing could be further from the truth!  You can always make charitable contributions of any money you wish… the question is, what will such a move do for you tax-wise?

In the olden days…

Under the old law (through December 31, 2009), there was a special provision that allowed an IRA owner who is at least age 70½ to make a charitable contribution of up to $100,000 directly from the IRA account to a qualified charity.  This money was never counted in your income, and as such making such a move had no impact on your current income tax situation – positive or negative.  The benefit came about with regard to your estate, since those funds were no longer counted as part of your estate.  Plus you got to feel really good about making a contribution to your favorite charity.

In 2010 and beyond…

Under the present law (beginning on January 1, 2010), the special provision mentioned above is no longer in effect.  But you can still make charitable contributions from your IRA account – the only problem is that you must first count the distribution from your IRA as income, and then you account for the charitable contribution among your Schedule A Itemized Deductions.  The end result is the same, right?  O contrare, Mona Me.

The problem is that, by having to count your IRA distribution as income, you will increase your Adjusted Gross Income (and therefore your Modified AGI), both of which can have a significant impact on other items on your tax return.

Example

Let’s run through an example:  you’re retired, age 72, have an IRA worth $50,000, and you want to contribute the entire amount to your favorite charity.  Your other income, along with your spouse’s income, totals $70,000.    Included among your tax return items is $10,000 in medical expenses, along with other deductions (real estate tax, home mortgage interest, etc.) amounting to $15,000.  You had no other charitable contributions for the year.

Under the 2009 rules, your AGI is $70,000. Your itemized deductions amount to $19,750 – because your medical expense deduction is limited to the amount over 7.5% of your AGI.  Since 7.5% of $70,000 is $5,250; we subtract that amount from $10,000 and come up with $4,750, which we then add to the rest of your itemized deductions for a total of $19,750 in deductions.  Subtract the itemized deductions from your AGI ($70,000 minus $19,750) equals $50,250.  Then subtract your personal exemptions of $7,300 from that and you get $42,950 in taxable income.  Tax on this amount is $5,607.50.

Under the 2010 rules, your AGI is $120,000. (The IRA distribution of $50,000 is added to the rest of your income.)  Itemized deductions are now $66,000, because your medical expense deduction was reduced to $1,000 – $120,000 times 7.5% equals $9,000, subtracted from $10,000 equals $1,000.  We add the rest of your itemized deductions (including the $50,000 charitable contribution deduction) and come up with $66,000 ($15,000 plus $1,000 plus $50,000).  Subtracting the itemized deductions from your AGI equals $54,000, and then we subtract the personal exemptions of $7,300 (it didn’t change for 2010) to come up with taxable income of $46,700.  Tax on this amount is $6,167.50.

Under the new rules, you just lost $560.  Or rather, you paid 10% more in taxes than you did with the same circumstances as the year before.  So, while it’s still possible to make a charitable contribution from your IRA account, it’s more costly to do so.

Other items affected by AGI

There is a significant number of items on your tax return that are impacted by the amount of your AGI – listed below are some of the more common ones:

• taxable amount of Social Security (or Railroad Retirement) benefits
• allowable losses from rental real estate activity with active participation
• deductible traditional IRA and spousal IRA contributions
• ability to contribute to a Roth IRA
• miscellaneous itemized deductions, including non-reimbursed employee job expenses
• and a number of miscellaneous credits

These and many other components of your tax return can be impacted by an increase in your AGI, so you can see why this change in laws has had a significant impact on many folks.

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author