Finally, a reliable path for retirees to donate to charity

CHICAGO (Reuters) - It is all clear now. Retirees can make charitable donations from their Individual Retirement Accounts anytime under the latest U.S. budget deal.

Congress made it possible to donate directly to non-profit causes from IRAs in 2006. But it has been a rollercoaster ever since because the Qualified Charitable Distribution (QCD) would sunset every couple years, leaving donors uncertain whether the provision would be renewed.

But the QCD is now permanent, after the U.S. budget approved in December turned a smart tax and estate planning tool into a reliable one.

The provision allows IRA holders aged 70-1/2 and older to make direct donations of up to $100,000 annually without first taking taxable withdrawals from their accounts.

That means households can make larger contributions before hitting the maximum tax deduction and carryforward limits. The big benefit is keeping donations out of the adjusted gross income reported on your tax return.

Higher adjusted gross income could push you into a higher marginal income tax bracket and increase taxes on your Social Security benefit. This is computed using what Social Security calls "combined income" - your adjusted gross income plus tax-exempt interest, plus half of your Social Security benefit.

When an individual's combined income exceeds $25,000 ($32,000 for joint filers), 50 percent of the excess amount is taxed as ordinary income. If an individual's combined income exceeds $34,000 ($44,000 for married couples), 85 percent of the excess amount is taxed as ordinary income.

Higher adjusted gross income also can also trigger the high income surcharges on Medicare Part B premiums for outpatient services. The surcharges on start at $85,000 in annual modified adjusted gross income for individual filers ($170,000 for joint filers).

This year, the extra monthly premium charges range from $66 up to $285 monthly for the highest-income seniors.

Anything you donate through a QCD also helps satisfy the annual required minimum distributions that must be taken from IRAs starting at age 70-1/2. IRA owners who do not need the distributions for living expenses could avoid generating tax liability by donating that way.

HOW TO DONATE

QCDs can be made to any non-profit organization from any IRA, but not from a simplified employee pension, simple retirement account or inherited IRA.

Instruct your IRA custodian to transfer from your IRA directly to the charity. Get an acknowledgment for tax purposes, just as you would with any other donation.

Depending on your taxable investments, however, donations from your IRA may not be the best solution.

Donating appreciated stocks could save even more money by being tax-deductible and avoiding capital gains taxes, said Michael Kitces, partner and director of research for Maryland-based Pinnacle Advisory Group.

"While it's appealing to make a pre-tax contribution directly from an IRA to a charity, the reality is that the 'double tax benefit' of donating appreciated securities to a charity is still superior for tax purposes," he said.

At least now with the QCD being permanent, retirees will have a choice, and not have to guess at what to do.

Last year, some financial planners and tax advisers advised clients to go ahead with direct donations even though the QCD had expired, on the assumption that it would be renewed. That turned out to be a smart move.

Other donors were left with only a couple weeks in December after the budget passed to take advantage of the reenacted opportunity. "This gives people certainty. They can start planning much earlier in the year rather than when Congress gets around to it," said Mike Jones, an estate planning expert at Thompson Jones LLP.

(The writer is a Reuters columnist. The opinions expressed are his own.)

(Editing by Beth Pinsker and Richard Chang)