Distributions can be made from taxable funds in an IRA or Roth IRA, but not from employer plans or SEP and SIMPLE IRAs. The distribution will not be taxable to you, but you don’t get to deduct the charitable contribution on your tax return. This is more advantageous to taxpayers because even though you get a charitable deduction if you take the IRA withdrawal and report that amount in income, many taxpayers do not itemize, and therefore they don’t always get to take advantage of the deduction.

The direct transfer from the IRA to the charity can also satisfy a person’s required minimum distribution for the year. If you are charitably inclined, it may be best to contribute from the IRA, at least up to the RMD amount thereby avoiding that amount being included in income. This will lower your adjusted gross income (AGI) and might avoid or lessen the amount of Social Security benefits that are taxed.

The reduction in AGI can also increase tax deductions, exemptions or credits that are pegged to AGI either in terms of specified amounts or as a percentage of AGI. The distributions are deemed to come from income first if the IRA has non-deductible contributions. This contrasts with the normal pro-rata rule that applies to other IRA distributions where there are after-tax funds in the IRA.

If you want to take advantage of this provision for 2008, then you must make a direct IRA transfer to the charity before year end. The distribution must be made directly from the IRA custodian/trustee to the charity. It cannot be distributed to the IRA owner, who subsequently writes a check to the charity. If that is done, then the provision will not apply and the distribution will be taxable. However, you may be able to take a tax deduction for the contribution (under the regular rules that applied before this provision became effective).

Finally, to qualify for this provision, you must have documentation to substantiate the donation (something in writing from the charity showing the date and amount of the contribution, and certifying that nothing of value was obtained in exchange for the contribution). It is generally a good idea to send the charity a letter notifying them of the amount of the contribution and where the contribution is coming from as well as requesting verification of receipt of the gift.

Charities must fall under IRS code section 170(b) to be eligible. Donor advised funds, charitable remainder trusts and private foundations are ineligible. The IRS has not yet provided guidelines regarding coding for 1099 forms or 1040 reporting. Until guidelines are published, many firms are relying on advice from the Investment Company Institute. For instance, the IRA owner is responsible for maintaining documentation to verify with the IRS that requirements were met. The IRA owner is responsible for verifying the charity is a qualified charity for this purpose. The IRA owner is also responsible for verifying their compliance with the annual limit of $100,000.

Most firms will report the distribution as a normal distribution, but will advise the IRA owner to make a note of “charitable distribution” on their records. The IRA owner must provide instructions to waive withholding since the distribution will not be taxable.

The IRA owner is responsible for any reporting the IRS requires regarding the nature of the distribution. For most securities-based accounts including mutual funds, the IRA owner must obtain a signature guarantee on the request form since the distribution is being sent to someone other than the shareowner at the address of record.

It’s a good idea to consult with your financial planner before making your donation.

December 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided (and edited) by Kristine McKinley, CPA, CFP, a local member of FPA.

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It basically talks about how the AMT is supposed to keep the rich from paying too little tax, but since the AMT rules have never been adjusted, it’s middle income Americans who are facing the AMT. 

I agree that the AMT needs to be fixed, as more and more of my clients become subject to the AMT every year.

Click here to read more.

Tags: AMT, alternative minimum tax

The Morningstar Classroom offers over 172 courses on investing.  Topics cover stocks, bonds, mutual funds and portfolio management. 

The classes are free and start from a basic learning level and progress up to an advanced level, so investors of all levels can improve their investing knowledge.  Visit the Morningstar Classroom to review the course catalog and to sign up. 

In addition to these free courses, Morningstar also offers investing workshops for a nominal fee.  The workshops are more in depth than the free courses, and include exercises to help sharpen your investing skills. 

Finally, Morningstar has some great articles on their website.  My favorite columnist is Sue Stevens.  Click on the Personal Finance tab to read Sue’s articles.

Tags: investing

Today I want to talk about where to keep your emergency fund.

If you’ve followed the guidelines (3 to 6 months of living expenses, or $1,000 if you’re working on a ‘baby’ emergency fund), then you may have a substantial amount of cash lying around.

You don’t want this money sitting in a checking account earning no interest, or a savings account that earns less than 1% interest.

On the other hand, you don’t want to put your emergency fund at risk.  So where to put that cash?  Here are some suggestions:

1.  Look for a money market account at a bank or credit union in your area.  A great place to start your research is Bankrate.com, where you can search by your location.  Your local paper might also list money market accounts in the money or finance section.

2.  If you’re comfortable with online banking, check out internet banks such as ING, HSBC, or Emigrant.  Online banks may offer a higher interest rate than local banks because they have lower overhead.

3.  CDs – although a good portion of your emergency fund should be in liquid accounts that are easy to access, you might want to keep part of your emergency fund in CDs to earn a higher interest rate.  Shop Bankrate.com or your local banks for the best rates.

4.  Money market mutual funds – if you already have investments with a mutual fund company or brokerage company, you might consider using a money market mutual fund for your emergency fund.  Rates are competitive and this option may be more convenient for you if you already have a brokerage account. 

5.  Short-term and ultra short-term bond funds – these are bond funds which fluctuate based on what the bond market is doing, so the value of your bond fund can go down.  However, there is potential for a greater return than a money market or CD, if you don’t mind the additional risk.

Tags: saving money, budgeting, emergency fund