Tax Free Transfers to Charity – Act by January 31st to Benefit

Under the American Taxpayer Relief Act of 2012 (ATRA), the IRS extended the window for retirees to maximize tax free distributions from their IRA accounts for 2012. Taxpayers over age 70 ½ who own an IRA (individual retirement arrangement) may take advantage of direct transfers to qualified charitable organizations by the end of this month, and elect to utilize their benefit for the tax year ended 2012.

By way of background, under pre-ATRA law, taxpayers over 70 ½ could make a qualified charitable distribution from their IRA if it was made directly from the IRA trustee to the qualified charity.  A qualified charity is a charitable organization, other than a private foundation or donor advised fund.  These qualifying distributions would count toward an individual’s required annual minimum distribution (RMD).  Qualified distributions are not included in income, and are not included in total charitable contributions made by the taxpayer.  In years when itemized deductions are limited for high net worth individuals, treating the distribution this way is tax advantageous.

ATRA now provides:

• If the taxpayer has already taken their required minimum distribution from their IRA in 2012, they may elect to donate an amount up to the distribution actually taken in December 2012, up to $100,000, and have it count as if it were a direct tax free donation to charity on December 31, 2012.  The donation amount is excluded from gross income and therefore not taken as a charitable deduction on the taxpayer’s Schedule A, Form 1040.  From a planning standpoint, taxpayers who exercise this election are exchanging a 2013 charitable deduction for a decrease in adjusted gross income for 2012. 
• If the taxpayer has not already taken their required minimum distribution from their IRA in 2012, they may elect to utilize the ATRA extension to cure the distribution deficiency which would otherwise be subject to penalties up to $100,000.  This is a great opportunity to take the distribution, minimize penalties, all while giving to a worthy cause.  A transfer made in the month of January retroactively counts toward 2012 and will not count for 2013.  The required minimum distribution for 2013 must still be made. 

These important extensions in ATRA go a long way to helping taxpayers maximize the benefits available from making charitable contributions from IRAs for both those who have met their 2012 RMD’s and those who did not and may be subject to penalties.  However, corrective action must be taken by 1/31/13, even though the ultimate elections need not be made until their 2012 returns are filed.

For guidance on this time sensitive matter, please contact your Marcum tax professional.