The provision that permits taxpayers age 70½ and over to make direct distributions (up to $100,000 per year) from their Traditional or Roth IRA account to a charity is available for tax years 2010 through 2013. The distribution is tax-free, but there is no charitable deduction. This provision can be very beneficial to taxpayers who have social security income and/or do not itemize their deductions.
Important - Because the extension of this benefit for 2012 and 2013 was passed after the end of 2012, Congress included two special rules. The first one permits distributions taken in December 2012 that are paid in cash to charities before February 1, 2013 to be treated as a charitable distribution and therefore not taxed in 2012. These January 2013 donations are an exception to the rule discussed below that the IRA distribution must be a direct transfer from the IRA trustee to the charitable organization. The second special rule permits charitable distributions made in January 2013 to be deemed made on Dec. 31, 2012.
The key benefits of making a direct charitable IRA distribution lie in the fact that the distribution:
(1) Is not included in the taxpayer's income for the year,
(2) Counts toward the taxpayer's minimum required distribution for the year if any, and
(3) Does count as a charitable contribution for the year (although not a deductible contribution).
How does a taxpayer benefit from this provision?
- By making a contribution directly from the IRA, taxpayers are able to exclude the amount that was contributed from their income for the year, which is essentially the same as deducting the contribution without itemizing their deductions.
- This technique also lowers a taxpayer's adjusted gross income (AGI) for other tax breaks pegged at various AGI levels, such as medical expenses, passive losses, etc., allowing them greater benefits from the AGI-limited deductions.
- For taxpayers receiving Social Security (SS), the taxability of the SS is also based on income. Thus, excluding the portion of the IRA distribution directly distributed to the charity can, in some cases, reduce the taxable portion of the SS.
- Taxpayers who wish to make very large contributions (up to the $100,000 limit) can do so with IRA funds that would have otherwise been taxable to them.
Caution – It is important to stress that a qualified charitable IRA contribution must be directly distributed to the qualified charity. Otherwise, the distribution is taxable as income and the charitable deduction would be taken on the taxpayer's itemized deductions subject to all the normal limitations. If may be appropriate to call this office before attempting to execute this strategy.