One-time tax break helps charities
By SANDRA BLOCK
USA Today
Last week, University of Pennsylvania alumnus Raymond Perelman and his wife, Ruth, pledged $25 million to finance a new advanced-care medical center at the university that will bear their name.
Your year-end charitable contributions will probably be more modest. But if you're retired, make more money than you need and want to make a difference in the world, this is the year to do it.
A federal law adopted to help Hurricane Katrina victims contains a one-time provision that lifts limits on the amount you can deduct for charitable contributions for 2005.
Ordinarily, that deduction is limited to 50 percent of your adjusted gross income. Donations that exceed the cutoff can be carried over for up to five years.
To encourage giving, the new provision allows donors to deduct cash contributions of up to 100 percent of adjusted gross income.
The provision has led to an avalanche of solicitations from colleges and other charities urging donors to increase their giving this year. But, in reality, "there are very few people who would give away more than 50 percent of their adjusted gross income in cash," says Holly Isdale, head of wealth advisory services for Lehman Bros.
In 2004, the average affluent investor — defined as someone with more than $500,000 in investment assets — donated 6 percent of his or her gross annual income to charity, according to a survey by the Spectrum Group, a consulting firm.
The most likely big donors are senior citizens who have significant savings, financial planners say. Some examples of taxpayers who could take advantage of the tax break:
Ordinarily, when you withdraw money from an IRA, the money is taxed at your ordinary income tax rate. You can turn around and give the money to charity. But your deduction is limited to 50 percent of your adjusted gross income.
But under this one-time provision, you can deduct the entire contribution, wiping out most or all of the taxes on the IRA withdrawal.
Don't try this if you're under 59 1/2, because the law doesn't waive the 10 percent penalty on early withdrawals. And depending where you live, you may owe state taxes, says Mark Joseph, a financial planner at Sentinel Wealth Management in Reston, Va.
Consult a tax professional before making a large IRA contribution.
Donating IRA funds to charity may appeal to retirees in their 70s and 80s who don't expect to outlive their retirement savings. Rather than arranging for charities to inherit the money, the provision allows these people to make contributions while they're still alive, Isdale says. "You get to see it happen," she says. "I get to see the kids who have scholarships paid for out of my IRA."
