IRAs provide income for you to live off of in your retirement years. However, if you've planned well and have extra money in your IRA, you can gift money out of the account, but usually only after you've taken the distribution. Depending on whom you're giving the money to, you might end up lowering your income taxes or increasing your gift taxes for the year.
Taxes on Distributions
Any time that you take distributions from your IRA, you have to report them on your income taxes. If you take distributions from a traditional IRA, the distributions count as taxable income, even if you give them away after you cash the check or otherwise deposit the money in your account. If you have a Roth IRA, your qualified distributions are tax-free, but you still must report the distributions as a tax-free IRA distribution on your taxes.
Gift Taxes Possible
If you make large gifts to any individual, you may end up owing gift taxes if you give to much to any one person. Since 2009, the annual gift limit has been $13,000 for each person to whom you gift money. For example, if you gift $9,000 to a friend and $9,000 to your niece, you won't owe any gift tax. However, if you give $18,000 to your friend, you'll owe give taxes on $5,000 of the gift. The gift tax does not apply if you gift money to pay for tuition or medical expenses, gifts to your spouse or gifts to a political organization. The IRS changes the gift limit, so always check current IRS regulations for the most recent gift limit.
Deduction to Gifts to Charity
If, instead of another person, you gift your IRA distribution to a qualified charity, you can claim a deduction for your gift. The deduction is an itemized deduction, so in order to take advantage of the tax break you have to forgo your standard deduction. Qualified charities include nonprofit schools and hospitals, charitable foundations and religious organizations. However, the deduction is limited to a maximum of 50 percent of your adjusted gross income for the year, and may be only 30 percent depending on the charity to which you make the donation.
Qualified Charitable Distributions
You can gift money directly from your IRA to a charity if you meet certain criteria. The distribution must be a required minimum distribution and you must be over 70 1/2 years old. In addition, you must have the trustee of your IRA transfer the money directly from the IRA to the charity and the amount of the qualified charitable distribution can't exceed $100,000. The advantage to using a qualified charitable distribution to gift your IRA to charity is you don't have to report the distribution as income and then itemize your deductions to claim the tax break.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."