Why It’s Not A Wash
The tax consequences of an IRA gift versus a non-IRA gift

A Few Other Notes About IRA Gifts
How your donors report; what types of IRAs; “direct” includes indirect

Consulting News
New clients and new gifts

Your Feedback
I’m interested in your opinion

“Isn’t making an IRA gift . . . the same as making a gift of non-IRA cash and taking the deduction? The answer is “not necessarily.””

There has been a good deal of activity around IRA gifts since the Pension Protection Act of 2006 was signed last August. I’m encouraging all our clients to continually promote IRA gifts and I foresee many gifts for 2007. (I don’t call them “charitable rollovers” because they aren’t rollovers. They are distributions. I prefer the simple “IRA gift.”)

Since last August I’ve been asked many times “Isn’t making an IRA gift and not being taxed on the distribution the same as making a gift of non-IRA cash and taking the (charitable income tax) deduction?”

The answer is, the two don’t necessarily produce the same financial result, depending upon the donor’s income, residence, itemizing and total charitable gifts for the year.

First, a quick refresher. The PPA allows people over seventy-and-a-half to make qualified charitable distributions up to $100,000 (per person) directly to qualified non-profits through December 31, 2007. These distributions will be excluded from your donor’s 2007 taxable income; will count toward their Required Minimum Distribution (often called “RMD”); and will not earn a charitable income tax deduction. To qualify, the gift must be such that 100% of it would have qualified for the charitable income tax deduction had the gift not been a qualified charitable distribution. Thus, tickets to your 2007 annual gala cannot be purchased with an IRA gift, and Charitable Gift Annuities are similarly ineligible. There is an issue of The Martignetti Report devoted to the important details of the PPA here.

Returning to the question I’ve faced in seminars and meetings, I have compiled four reasons why an IRA gift may be more advantageous than a non-IRA cash gift, assuming equal dollar amounts.

• If your donor does not itemize
Those who don’t itemize deductions on Form 1040 take a standard deduction from income. They don’t earn a charitable income tax deduction when they make a charitable gift. To get the tax advantage of an IRA gift one need not itemize. The amount of the IRA gift will be excluded from taxable income. In the next article I explain how your itemizing donors will report their qualified charitable distributions.

• Depending upon where your donor resides
I don’t know the tax codes of all 50 states, but I’m willing to bet there are states that have their taxpayers make independent calculations of taxable income, not relying on federal taxable income from the Form 1040. (If you’ll take that bet I know I’ll win because New York is one of them.) Those independent calculations may not include federally deductible charitable gifts. Then there are local taxing authorities as well that may not deduct the value of charitable gifts in computing taxable income. In the end, your donor’s tax professional takes responsibility for determining the effect of state and local taxes. You need to know that their effect may make the IRA gift more financially advantageous for your donors, depending upon their residence.

• Depending upon your donor’s income
An IRA gift reduces taxable income compared to the alternative of taking a personal distribution then making a gift to your institution; or making a gift out of some other non-IRA income. The IRA gift will cause lower taxable income by the amount of the gift (the qualified charitable distribution). And lower income may reduce your donor’s marginal tax rate.

Also, there are deductions and exemptions tied to taxable income. An example is the deduction for medical expenses which has a floor of 7.5% of adjusted gross income. Medical expenses are deductible only to the extent they exceed that floor. Taxpayers with deductible medical expenses will benefit by having a lower adjusted gross income.

• Depending upon where your donor stands under the percentage limitation
The income tax deduction for charitable gifts of cash is limited to 50% of adjusted gross income. If your donor has reached that maximum they must take advantage of the five year carryover (assuming it hasn’t already been exhausted) to continue deducting their gifts for the current and previous years. Thus, this year they may not be allowed to fully deduct their non-IRA gift of cash to your organization. If they make an IRA gift, however, their tax advantage comes in the form of lower taxable income. They don’t need (and aren’t allowed to take) the charitable income tax deduction.

There may be other reasons to prefer the IRA gift over an alternative gift of cash. Those are the four I’ve come up with. If this question comes your way, you will be armed with an answer.

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“I prefer not opening the door to the Roth discussion . . .”

Following are notes on a few questions that have arisen since the Pension Protection Act of 2006 became law.

• How your donor claims their exclusion from income
On Form 1040, your donor will report the total of all distributions from all their IRAs. On the very next line they report the “taxable amount” of distributions by deducting the tax exempt IRA gifts from the total.

This is consistent with tax policy regarding reporting of exemptions (and deductions). It is the taxpayer’s responsibility.

• What types of IRAs are eligible
IRS Notice 2007-7 asks and answers a number of questions about qualified charitable distributions. One of them is “What types of IRAs are eligible?”

Traditional and Roth IRAs can qualify. However, I’ve been hesitant to publicize the Roth availability because the likelihood of a Roth holding contributions that would be included in taxable income upon distribution to the IRA owner is small. That’s a requirement for a qualified charitable distribution. The final call belongs to your donor’s tax advisor, of course. I prefer not opening the door to the Roth discussion because the explanation is technical and there are trillions of dollars in traditional IRAs that come without the explanation and have a much greater likelihood of eligibility.

• The definition of “direct”
The PPA requires that a qualified charitable distribution go “directly” from the IRA trustee to an eligible non-profit. The question has arisen “What if the trustee sends a check to the IRA owner (your donor) that is payable to the non-profit and the IRA owner delivers the check to the non-profit?” That sounds indirect to me.

The IRS says that scenario will be considered a direct payment. That’s also from Notice 2007-7.

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• New client
  I am pleased to welcome Ronald McDonald House of New York, as our newest client. On the Upper East Side of Manhattan, they are the largest Ronald McDonald House in the country.



• New gifts
  It thrills me to announce the following recent gifts:
  $1,000,000 Charitable Remainder Trust at St. Francis Hospital
  $287,000 Charitable Gift Annuity at Baruch College, plus a few 5-figure CGAs
  55 new bequests throughout the colleges of the City University of New York

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I am always interested in your opinion of The Martignetti Report. You can reach me through the company website

Best regards,

Tony Martignetti, Esq.
Managing Director
Martignetti Planned Giving Advisors

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