Wipfli Alerts & Updates: Urgent - Limited Planning Window For Clients Age 70 ½ Or Older—IRA Distributions To Charity
January 10, 2013
As discussed last week, Congress recently passed legislation related to the “Fiscal Cliff”
deal. While most of the legislation applies to 2013 and future years, one small provision provides certain taxpayers a significant and time-sensitive planning opportunity for 2012 that must be acted upon before February 1, 2013.
Last week, Congress extended the widely popular “IRA to Charity” provision that gives taxpayers the ability to contribute up to $100,000 per person per year directly to charity from an IRA. The law applies retroactively to January 1, 2012, and also for all of 2013. The provision was previously set to expire on December 31, 2011. Notably, amounts paid to charity through this provision count towards satisfying your required minimum distribution (RMD) amount.
Overall, this is an extremely beneficial rule if you wish to make charitable contributions or if you plan to leave your IRA to charity. If you meet the requirements listed below, an IRA distribution will not be treated as ordinary income, and you will not receive a charitable deduction. In other words, the event is a complete wash for federal income tax purposes. As a result, this provision saves taxes for non-itemizers who would not otherwise use the charitable deduction as well as itemizers to the extent that the charitable limitations would have reduced the amount currently deductible for the contribution of the IRA proceeds. In addition, this provision reduces adjusted gross income, which can lower overall taxes by reducing the amount of taxable Social Security benefits, increasing the amount of medical expenses and miscellaneous itemized deductions allowed, and allowing more passive losses from rental real estate.
Because the legislation was not enacted until January 2, 2013, Congress included two special transitional relief provisions to allow certain payments to charity made before February 1, 2013, to be treated as being made in 2012:
The first provision allows individuals who received an IRA distribution in December 2012 to pay that amount (or a portion of it) in cash to an eligible charity before February 1, 2013, and still elect to count that as a 2012 IRA charitable contribution.
The second provision allows taxpayers to make distributions directly from an IRA to eligible charities before February 1, 2013, and elect to have such distributions treated as a qualified IRA charitable distribution in 2012.
If you anticipated the beneficial charitable rule would be extended and you had IRA distributions made directly to charity during 2012, you will get the full benefit of the law.
If you decided to instead take a normal RMD in 2012, you can use one of the two transition rules discussed above to obtain the benefits listed, provided you act before February 1, 2013. Which of the two transition rules you use depends on when you took your 2012 IRA distribution.
If you received IRA distributions in December 2012, you now may donate the cash you received in December to charity before February 1, 2013, under the first transition rule; this will reduce the amount of required minimum distribution that must be included in 2012 income.
For example, assume you received an RMD of $75,000 in December 2012. The first transitional rule allows you to donate the full $75,000 to charity before February 1, 2013, which will have the effect of reducing by $75,000 the amount of your RMD that you must include in your 2012 income. In addition, under the second transitional rule you may direct from your IRA an additional $25,000 distribution to charity before February 1, 2013, and have that amount considered a 2012 contribution, as well, to bring you to the $100,000 maximum.
IRA distributions taken prior to December 2012 do not fall under either transitional rule and are therefore reported as income like a normal IRA distribution taken for RMD purposes or otherwise. However, in addition to that previous 2012 distribution taken and reported as income, that person could now make an additional $100,000 IRA to charity distribution before February 1, 2013, and use the second transitional rule to elect to treat that as a 2012 distribution.
If we modify our example above for this scenario, if you took a $75,000 RMD in November 2012, you will need to report $75,000 of income on your tax return, and that amount cannot be reduced by either transitional rule. You may then direct from your IRA an additional $100,000 distribution to charity before February 1, 2013, and have that amount considered a 2012 contribution. Your total IRA distributions in this case would be $175,000, $75,000 of which is taxable and $100,000 of which qualifies as a qualified charitable distribution from the IRA.
The law contains seven requirements for qualified charitable distributions (QCD):
The distribution must come from an “IRA” account. That means 401(k) and other similar accounts do not work, although you can roll over funds from a 401(k) into an IRA and then distribute them directly to charity.
The recipient charitable organization must be qualified under the tax code. Most public charities (e.g., churches, hospitals, museums, and educational organizations) will qualify. Notably, though, donor-advised funds and private non-operating foundations do NOT qualify.
The IRA account owner must be at least age 70 ½ on or after the date of distribution.
The distribution must be made directly to charity. However, please see the limited exception above for certain distributions made before February 1, 2013.
The distribution to charity must otherwise be fully deductible.
The distribution must otherwise be included in gross income.
The total amount distributed to charity cannot exceed $100,000 per year.
This new law provides a significant and time-sensitive planning opportunity. As of the time of this Tax Alert, the IRS has not issued guidance on how these transactions must be reported. Based on past experience with these types of last-minute tax changes, we anticipate the IRS Service Centers may not properly record these transactions, and you may need to follow up with them to ensure accurate and correct tax treatment. Wipfli can assist in that process. If you have questions about how this impacts your specific tax situation, please contact Rick Taylor
, Ryan Laughlin
, or your Wipfli relationship executive.
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