Charitable Donations Pose Problem for Retirees

Article excerpt

Retirees can save themselves some tax consequences by setting up charitable gift funds rather than making donations straight out of their retirement accounts, a national financial columnist says.

However, the head of an Oklahoma financial firm says that fairly complex option would not address many of the tax-implication situations retirees encounter.

Writing for the National Center for Policy Analysis, financial columnist Scott Burns said that a couple on Social Security who cover additional expenses with IRA withdrawals may see their tax bill rise if they take out $1,000 to give to charity.

Taxes on traditional IRA accounts are deferred until funds are withdrawn.

Burns said that unless their deductions total at least $10,700, the standard deduction for a couple filing jointly for 2007, their tax bill will rise by their marginal tax rate, which is 15 percent for many retirees - about $150.

Burns also said that a couple with $36,000 in annual Social Security benefits can have only $14,000 of income from other sources before their benefits start being taxed. The next $1,000 of income - that withdrawal for charity - would cause $500 of benefits to be taxed, increasing their tax bill by $75, for a total of $225.

If the couple establishes a charitable gift fund with a sizable IRA withdrawal, Burns contends, the resulting taxable income would be offset by an itemized deduction in the same amount - therefore, zero taxes. Reducing the size of their nest egg would also have positive tax consequences for them, he said.

Once the fund is established, annual charitable donations would be made from it, not from IRA-generated income, Burns said.

Burns discusses making a fairly hefty IRA withdrawal to set up such a fund, the extent of which would affect taxation outcomes, as would tax changes wrought by itemizing rather than using the standard deduction, and other differences.

Charles Onstott Jr. CEO of the Oklahoma City financial firm Onstott and Associates Inc., said that, depending upon their circumstances, it is true that a retired couple can end up owing taxes by taking an IRA distribution and making a charitable gift. …