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.
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:
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:
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.”
The tax information contained herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
The material presented above is for informational purposes only and the statements made represent TIAA-CREF's interpretation of applicable law. It is presented with the understanding that TIAA-CREF (or its affiliates, distributors, employees, representatives and/or insurance agents) is not engaged in rendering legal or tax advice.