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Tax Breaks

Tax Breaks for Donating IRA Payouts to Charity in 2010?

See if donating your required minimum distribution (RMD) to charity will give you a tax break this year.

I’d like to give the required minimum distribution from my IRA to a charity this year. Did Congress restore the tax break for IRA payouts to a charity for 2010?

Not yet. For the past several years, IRA owners age 70½ and older could take a tax-free distribution of up to $100,000 from their traditional IRAs and donate it to a charity. This strategy helped trim the tax bill of retirees who, faced with taking required minimum distributions from traditional IRAs that had increased significantly in value through the years, would otherwise owe a big income-tax bill on their IRA withdrawals.

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You couldn't double-dip tax breaks -- in other words, you couldn't transfer the money tax-free to a charity and claim a charitable deduction for the same contribution. Both methods can lower your tax bill by the same amount, but giving your distribution to charity is a way to get a tax break for your donation if you don't itemize deductions on your tax return (many seniors don't itemize and can't deduct their charitable contributions). Donating the distribution to charity also means that amount is not counted toward your adjusted gross income, which can help you qualify for some other benefits (for example, your Medicare Part B and Part D premiums are based on your AGI). When you take the charitable deduction, the amount is subtracted (along with your other itemized deductions) after your AGI is calculated.

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The tax break for giving IRA money to charity expired at the end of 2009, but it’s one of several tax breaks that Congress is considering extending during its lame-duck session in December. So it’s a good idea to wait a little while before taking your required minimum distribution this year. But don’t wait until the very last minute, because the distribution must be out of your IRA by December 31, and it can take several days to process the transaction. If you miss the deadline, you’ll have to pay a penalty of 50% of the required amount that you failed to withdraw. (If you turned 70½ this year, you have until April 1, 2011, to take your first distribution.) See Mandatory IRA Distributions Are Back for details. These rules apply only to traditional IRAs; there are no required minimum distributions for Roth IRAs.

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To be safe, get your required minimum distribution ready to go in case the charitable transfer rule isn’t extended. Ken Hevert, of Fidelity, says that “due to the importance of getting this right, we would suggest customers contact us by December 15” to ensure that there is enough time to process a required minimum distribution. Distributions must be taken in cash, so it can take a few extra days if the money in your IRA is currently invested in stocks or mutual funds. It takes three days to settle a stock trade, and it can take several days to settle a mutual fund sale. At Fidelity, trades of the company’s own mutual funds typically settle in one day, but trades of non-Fidelity funds can take up to three days.

If the charitable-transfer rule is extended, however, the money must be transferred directly from your IRA to a charity. Contact your IRA administrator now to find out what you must do to make the transfer. For example, Schwab requires people making a charitable gift to use a paper distribution form. Also ask the charity about how to transfer money to them. For more information, see Last Minute Tax Savings for 2010.

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