For pre-2010 distributions, an exclusion from gross income (not to exceed $100,000) is available for otherwise taxable IRA distributions that are qualified charitable distributions as defined below. Such distributions from an IRA aren’t subject to the percentage limitations on making contributions since they will neither be included in gross income or be claimed as a deduction on the taxpayer’s return. Since such a distribution is not includible in gross income, it will not increase adjusted gross income for purposes of the phaseout of itemized deductions, personal exemptions, or any other deduction, exclusion, or tax credit that is limited or lost completely when adjusted gross income reaches certain specified levels.

To constitute a qualified charitable distribution, the distribution must be made directly by the IRA trustee(after the IRA owner attains age 70 ½) to a charitable organization . Also, to be excludible from gross income the distribution must otherwise be entirely deductible as a charitable contribution deduction without regard to the charitable deduction percentage limits discussed above. Thus, if the deductible amount is reduced because of a benefit received in exchange, or if a deduction is not allowable because the donor did not obtain sufficient substantiation, the exclusion is not available for any part of the IRA distribution.

Illustration (1): Jason, who is age 71, is the owner of a traditional IRA with a balance of $300,000, consisting solely of deductible contributions and earnings. He wants to make a contribution of $100,000 to his college before the end of 2009 to mark the 50th anniversary of his graduation. Jason, who is a widower and files his tax return as a single taxpayer, expects to have adjusted gross income of $110,000 in 2009, itemized deductions of $25,700 (before taking the $100,000 contribution to his college into account) and a personal exemption of $3,650 in computing his taxable income. The itemized deductions of $25,700 include $20,000 of other contributions to public charities.

If Jason takes a distribution of $100,000 from his IRA, his adjusted gross income for 2009 will be increased to $210,000. If he then contributes the $100,000 to his college, it will only increase his total charitable deduction by $85,000 (the charitable deduction is limited to 50% of his adjusted gross income less the $20,000 of other charitable contributions he has made). While his gross itemized deductions will be $110,700 ($25,700 plus $85,000), the amount he may deduct will be reduced by $432 due to certain phase outs to $110,268. In addition, his personal exemption will be phased down by $438 . Accordingly his taxable income will be $96,520 (AGI of $210,000 less itemized deductions of $110,268, and less personal exemption of $3,212), and his income tax for 2009 will be $20,746.

If instead, Jason has the Trustee of his IRA transfer the $100,000 directly to his college, his adjusted gross income will not increase and he will not be entitled to a charitable contribution deduction for the amount transferred from the IRA. His adjusted gross income will remain at $110,000, and there will be no reduction in his itemized deductions of $25,700, and his personal exemption of $3,650. His taxable income will be $80,650 ($110,000 less itemized deductions of $25,700, and less personal exemption of $3,650), and his income tax for 2009 will be $16,350, or $4,396 less than it would have been if he had taken a distribution of $100,000 from his IRA and then contributed it to his college.

Illustration (2): The facts are the same as in illustration (1) except that $60,000 of the $300,000 in Jason’s traditional IRA (20% of the total value of the IRA) consists of nondeductible contributions. If $100,000 is distributed to Jason and then contributed to his college, only $80,000 will be included in his gross income (80% of the total distribution). On the other hand if the $100,000 is transferred directly by the IRA’s Trustee to Jason’s college, the entire $100,000 will be treated as coming from earnings and deductible contributions, no part will be included in Jason’s gross income, and $60,000 (30%) of the $200,000 amount remaining in the IRA will continue to consist of nondeductible contributions. Thus, if Jason takes a further distribution of $10,000 from the IRA in 2009, only $7,000 (70% of $10,000) will be includible in his gross income.

Illustration (3): Jack, a widower, age 73, expects to have adjusted gross income of $100,000 in 2009 before taking any distributions from his traditional IRA into account. Jack has $80,000 in his IRA including $50,000 of nondeductible contributions. Jack plans to make $13,350 in charitable contributions in 2009 not counting $50,000 he plans to make as a gift to his church. To make the gift to his church, he plans to take $50,000 from his IRA. If he makes the gift directly from the IRA to the church, his taxable income for 2009 will be $83,000 (adjusted gross income of $100,000, less itemized deductions of $13,350, less personal exemption of $3,650).

On the other hand, if he takes a distribution of $50,000 from the IRA, $40,000 of the distribution will be included in his gross income and will increase his adjusted gross income to $140,000. However, if he distributes the entire $50,000 to his church his charitable contributions will increase to $63,350 ($13,350 + $50,000). His taxable income will be $73,000 (adjusted gross income of $140,000, less itemized deductions of $63,350, less personal exemption of $3,650). Thus, his taxable income will be $10,000 less than it would be if he made the contribution through a direct transfer to his church from his IRA.

Even though a direct distribution from an IRA to a charity is not included in the taxpayer’s gross income, it is taken into account in determining the owner’s required minimum distribution (RMD) for the year. Thus, if the amount distributed directly from the IRA to an eligible charity at least equals the amount of the owner’s RMD for the tax year, he will not be required to take any other distribution from the IRA for that tax year. Note that RMDs have been suspended for the 2009 tax year.