The fiscal cliff deal and you: January 31 deadline for IRA charitable gifts

You have likely heard a lot already about the American Taxpayer Relief Act passed on January 1. While much of the planning that will result from this Act is likely to occur throughout the year, one element — the extension of the IRA to charity provisions—warrants more immediate attention due to a January 31 deadline to take advantage of certain elements of the Act

If you are over the age of 70½, you can make a direct charitable gift of up to $100,000 per year from your IRA without having to report it as taxable income on your federal income tax return. The American Taxpayer Relief Act extended these provisions for 2012 and 2013. The Act also allows taxpayers to treat any cash gifts made by January 31, 2013, as having been made on December 31, 2012. That provision effectively allows you to take advantage of the IRA-to-charity provisions for both 2012 (retroactively), and then with an additional gift for your 2013 contribution.

Article Highlights

  • The American Taxpayer Relief Act allows some taxpayers to donate up to $100,000 to charity from their IRAs without reporting it as taxable income.
  • If you are over the age of 70½, act now to make a 2012 charitable donation from your IRA by January 31.
  • You can make an additional donation for 2013 by the end of the year.

The ability to make distributions directly from your IRA to charity was first made available in 2006, and has been one of the individual tax laws that have typically been extended on an annual or bi-annual basis. Because these extenders were not put through for 2012 until January 2, 2013, the American Taxpayer Relief Act included special transition rules that allow for the January 31 contribution deadline.

The new law also allows you to treat the required minimum distribution amount you received in December 2012 as a qualified charitable distribution to the extent that you transfer (in cash) the same amount to a qualified charity by January 31, 2013.

This option may be particularly appealing if:

  • You are required to take minimum distributions and you wish to make charitable gifts. The provisions will allow you to capitalize on your gift without increasing your adjusted gross income. In 2013, this may be particularly attractive as income above certain thresholds is subject to phase-outs of itemized deductions and personal exemptions, as well as higher tax rates on income and capital gains.
  • You would otherwise claim the standard deduction, but you make charitable gifts. Approximately two-thirds of all taxpayers take the standard deduction. If the only itemized deduction that a taxpayer would claim is gifts to charity, then the tax-free distribution from an IRA to charity will allow you to still claim the standard deduction, and benefit from your charitable contribution. If you make a tax-free IRA distribution to charity, you can get the equivalent of a deduction by making gifts directly from your IRA to qualified charities without being taxed on the income (from the distribution that ordinarily would have been taxable if not for the direct distribution to charity).
  • You itemize your deductions and typically maximize your charitable deductions. If you itemize your deductions on your income tax return and typically meet or exceed the adjusted gross income ceilings for the deductibility of your charitable gifts (e.g., 50% of adjusted gross income for cash gifts), the distribution directly from an IRA to charity effectively constitutes an additional charitable deduction. A qualified charitable distribution operates separately from the AGI limitations that would otherwise govern the amount that you are able to deduct in a given year. Therefore, if you are inclined to give more to charity than you would otherwise be permitted to deduct, transferring assets directly from your IRA to charity is an ideal way to do that.
  • You itemize your deductions and wish to minimize the reduction of other allowable deductions. By not increasing your adjusted gross income (as you would have done had you not made a qualified distribution to charity, but instead took a withdrawal from your IRA and then wrote a check to the charitable institution), you can avoid or minimize the reduction of other allowable deductions that are tied to your adjusted gross income – the 10% adjusted gross income floor on medical expense deductions, and the 2% adjusted gross income floor on miscellaneous itemized deductions.
  • Your state does not allow state income tax charitable deductions. There are several states that either have no deduction for charitable gifts, or have a limited deduction. If a gift is made directly to a charity from an IRA, it does not matter if the charitable deduction is available.
  • You have made nondeductible contributions to your Traditional IRA and are thinking of completing a Roth conversion. If you have made nondeductible contributions to a Traditional IRA, distributions from the IRA to charity are deemed to come first from the deductible, or taxable, portion.

Do charitable distributions have to come from IRAs?

To qualify, the distribution must be made from a Traditional IRA; gifts cannot be made from a 401(k), 403(b), Keogh or other qualified plan. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pensions (SEPs), also do not qualify.

If you only hold assets in your 403(b) plan, for example, you must first roll funds over into a qualified IRA, which is generally tax-free. The qualified IRA can then be used to make the distribution directly to charity.

In addition, you can make the direct charitable gift if you are the beneficiary of an inherited IRA and you are over age of 70½.

Which charitable organizations qualify?

The charitable organization must be a public charity and cannot be a donor-advised fund or supporting organization. Many private foundations are not eligible under this Act. In addition, charitable annuity trusts or unitrusts do not qualify.

To assist your IRA administrator in making the distribution to the charitable organization, it is a good idea to contact the charity to obtain its tax identification number and address. Some charities have a draft letter that you can provide to your IRA administrator to help facilitate the transaction.

Does the gift qualify for a charitable income tax deduction?

Charitable gifts under this provision must be made directly from the IRA administrator to a charitable organization. By having the IRA administrator give the money directly to the charity, (rather than you as the IRA owner receiving a distribution and then later writing a check to the charity), you are able to exclude the IRA distribution from your income. Since the charitable contribution is excluded from your income, you cannot claim an income tax deduction for the donation. By not paying income tax on otherwise taxable income, you are receiving the equivalent of a charitable deduction.

Should I request acknowledgment from the charitable organization?

If the charitable organization does not send you a written acknowledgment of the direct gift, you may wish to inform the organization of your donation and request written acknowledgement of:

  • the gift amount
  • the organization’s status as a public charity qualified to receive donations from IRAs
  • the fact that the gift will not be distributed to a donor-advised fund or supporting organization, and that you received no goods or services in exchange for the contribution.

Consult your advisor

The charitable IRA provision is a measure that can make sense for a large number of people. Please talk to a qualified tax advisor to determine the most appropriate method to make, track and report any 2012 gifts based upon the transition rules.

For more information on the provisions of the American Taxpayer Relief Act, please see “The fiscal cliff deal and you: Will your taxes increase?” and “The fiscal cliff deal and you: Understanding gift and estate taxes.”

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