Extension of the IRA

Extension of the IRA
Tax and Trusts & Estates UPDATE

The Emergency Economic Stabilization Act of 2008, signed into law on October 3, 2008, has extended, through December 31, 2009, the IRA charitable distribution provision originally included in the 2006 Pension Protection Act. As we noted in our September 2006 Tax and Trusts & Estates UPDATE, this provision gives older taxpayers the ability to exclude up to $100,000 per year from their federal income when they make a "qualified charitable distribution" directly from their IRA. Couples with separate IRAs may exclude up to $200,000 per year. The extended provision is retroactive, in that it applies to charitable distributions made from January 1, 2008. In order to qualify for the tax benefit in 2008, the distribution must be received by the qualified charitable recipient by December 31, 2008, and (as with other charitable contributions), it is imperative that you receive a contemporaneous written acknowledgement of the gift from the charitable donee if the amount of the gift is $250 or more.

To qualify for this exclusion from your federal income tax, you must have attained age 70½ on the date of the distribution to charity, the distribution must occur in 2008 and/or 2009, and the distribution must be directly transferred from the IRA to a public charity (or certain private foundations that make immediate distributions of the contributions). Distributions to a donor-advised fund or a supporting organization are specifically excluded from the definition of a "qualified charitable distribution," and therefore do not qualify for this exclusion.

Another benefit of this exemption is that the charitable distribution counts toward the donor's annual required minimum distribution that must be withdrawn each year after the IRA owner attains age 70½.

Finally, as mentioned above, this extended provision applies to distributions from traditional IRAs1. Also, as mentioned in our November 2006 Tax and Trusts & Estates UPDATE, any distribution from an IRA that would otherwise be considered income for New Jersey Gross Income Tax purposes will continue (at least at this point) to be taxed as pension and annuity income on your New Jersey Income Tax Return (Form NJ-1040), even if those funds constitute a "qualified charitable distribution" for federal income tax purposes.

1 Although the provision also applies to Roth IRAs, there would be little tax reason to distribute a Roth IRA to charity, since Roth distributions are tax-free to non-charitable distributees. Also, 401(k) plans, 403(b) annuities, defined benefit and defined contribution plans, profit sharing plans, etc., are not eligible.