Pension Protection Act of 2006
by Joel Long - ELDCPS Treasurer

Congress has recently taken important steps to strengthen America’s retirement system while also encouraging additional charitable giving. The Pension Protection Act of 2006 may offer you new opportunities for tax-free charitable giving.

Of special note, the new law includes incentives for those 70 ½ years of age and older who would like to make charitable gifts from potentially taxable Individual Retirement Account (IRA) funds.

ENHANCED TAX INCENTIVES

Our U.S. tax system has long encouraged charitable giving. Gifts to Erie Lackawanna Dining Car Preservation Society, Inc., for example, may be deducted from income that could otherwise be subject to tax under current tax laws.

Some taxpayers, however, may encounter limits on the amount of charitable gifts they can deduct and see other benefits phased out as their incomes increase. Retired persons may also find that increases in income can cause more of their Social Security benefits to be taxed. In other cases, they may not be in a position to fully benefit from their charitable deductions.

The Pension Protection Act of 2006 (PPA) gives those as least 70 ½ years of age the opportunity to help overcome those and other challenges by making tax-free charitable gifts. Making gifts from IRA funds that would be subject to tax if withdrawn voluntarily or under mandatory withdrawal requirements may be wise for many this year and next.

For 2006 and 2007, Congress is allowing these individuals with traditional or Roth IRAs to make tax-free gifts directly to qualified charities. Donors may choose to make charitable distributions in any amount up to $100,000 per year, if so desired. A couple with separate IRAs could each give up to that amount. Also, individuals who have been forced to take un-needed required distributions will find the new law of particular interest.

Also, IRA assets are not only subject to income tax when withdrawn during one’s lifetime or by survivors, but they may also be subject to estate tax if left to loved ones other than a spouse. For that reason, IRAs may be a good choice for some when deciding how to fund charitable gifts.

Example 1:
Ellen and George, ages 71 and 74, are comfortably retired with income from various sources, including amounts they must withdraw from their IRAs each year. They also enjoy making charitable gifts.

Their IRA withdrawal amounts are fully reportable as part of their adjusted gross income, potentially causing a number of adverse tax consequences, even when used to make charitable gifts.

This year they have been advised to contact their IRA administrator and make charitable gifts directly from their IRA. They are pleased to learn that under the terms of the new tax law, they can make their gifts directly from their IRA to the church without regard to percentage limitations and other provisions that might have limited their tax benefits in the past.

Example 2:
Martin, age 72, lives comfortably on his pension, Social Security and savings. He is also required to take minimum annual distributions from his IRA each year and is taxed on those funds. This distribution also results in more of his Social Security income being subject to tax.

By directing a portion of his mandatory IRA withdrawal directly to a charity, he does not have to report that amount as income and avoids having to pay taxes on those funds. He also prevents additional tax on his Social Security.

ADDITIONAL DETAILS

To qualify, charitable gifts must be made from a traditional or Roth IRA. Funds accumulated in a 401(k), 403(b) plan, or other types of retirement accounts do not qualify. Check with your advisors to determine if you can transfer funds from another account to an IRA and then make charitable gifts.

ACT NOW FOR GREATEST BENEFIT

To enjoy the full benefit of this two-year opportunity, you must complete each year’s transfer prior to December 31 of that year. Check with your advisors about the best ways to take advantage of these new giving opportunities. Keep in mind that everyone’s circumstances are different, and state as well as federal tax laws may affect your plans. If you have any questions please feel free to contact :

Joel E. Long, Treasurer ELDCPS
1-866-261-6703 (office)
717-314-8362 (home)
jlong@eldcps.org

This is not intended to be legal, accounting, or other professional advice. For assistance in planning charitable gifts with tax and other financial implications, the services of appropriate advisors should be obtained. Consult an attorney for advice if your plans require revisions of a Will or other legal documents. Tax deductions vary based on applicable federal discount rates, which can change on a monthly basis. Some opportunities by not be available in all states.