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As many of you know, there have been several tax breaks in place for the last few years that will soon be (or have already been) phased out.  You are probably aware of this because of the recent debate over whether or not to prolong tax cuts for the wealthy (ultimately, these cuts were preserved for another year as part of a deal to extend unemployment benefits).  Students will be aware of the Hope Credit (or the American Opportunity Tax Credit) that provides a credit for some college expenses.  And first time home buyers will be kicking themselves if they missed out on the $8,000 tax credit that expired in 2010.  But what about those who are well beyond the first flush of adulthood and into their twilight years?  With very few exemptions and deductions for the elderly, 2011 could prove to be an expensive year.  Luckily, there is one credit that will allow them to avoid quite a bit of taxation.

For those citizens over the age of 70½, a tax deduction will be given for charitable contributions made from an IRA (Individual Retirement Arrangement).  When people start contributing to a retirement plan at an early age and then continue to work and contribute until the age of retirement (or beyond) without touching that money, they many end up with a lot more than they bargained for.  That’s a good thing, right?  Yes and no.  Unfortunately, the way most of these plans work is that you have to take a certain disbursement each year based on the amount of money in the account.  Remember that this money is tax free only until you draw it.  So when retirees begin to draw from their account, they can easily get bumped into a higher tax bracket and end up owing a lot in income tax.

In order to avoid this situation, many elderly opt to make charitable donations instead of losing the money to the government.  However, they aren’t eligible for many deductions in this area.  This is where the charitable contribution portion of our current tax law comes into play.  As it so happens, this particular law will continue through 2012 (although itemized deductions will now be subject to a cap).  So here’s how it works.

Those who are drawing from an IRA are legally allowed to donate up to $100,000 annually to charity - wait for it - TAX FREE!  The trick is that the amount donated is not considered income.  Therefore, it doesn’t have to be claimed and is not listed as a deduction.  This money comes directly from the minimum disbursement required by your particular IRA, but it doesn’t show up as income, meaning you get to pay much lower taxes.  Hurrah!

This is great news for elderly citizens on a budget.  It can be hard to take disbursements knowing that there are limits to what can be donated for a tax break, but since this portion of charitable donations from IRAs will be around for two more years, everyone who can take advantage of it should certainly do so.

Emma Martin writes for Roth IRA where you can find out how to open your Roth IRA and learn about IRA conversion to Roth as well as finding other tools and information to help you on the road to retirement.