Charitable IRA Transfer Proposal

Prior law permitted taxpayers age 70 1/2 or older to make tax-free distributions from their IRA (limited to $100,000 each year) directly to public charities.  This transfer counted as part of the taxpayer's required minimum distributions.  As a result, the taxpayer's adjusted gross income (AGI) was lowered by the direct transfer to charity.  A lower AGI can reduce the portion of Social Security benefits subject to income tax, and also permit additional medical expenses to become deductible.  The trade-off was the loss of the itemized charitable deduction for the direct transfer, but with lower AGI, the charitable deduction was in effect transferred to an "above-the-line" deduction.

Current tax law proposals will extend the charitable IRA transfer provision retroactively to the beginning of 2010 and through 2011.  An interesting feature of the proposal is that taxpayers may elect to treat transfers made in January 2011 as if made in 2010 for purposes of the annual $100,000 limit, and importantly, as part of their 2010 required minimum distribution amount.  The January 2011 feature is necessary because Congress is waiting until the last days of 2010 to extend the tax law, and taxpayers are unsure of what to do.

An alternative to waiting is to make the direct charitable IRA transfer now.  If the law is extended retroactively, it will include the transfer made before enactment of the extension.  If the law is not extended, then the charitable distribution is taxable, but it will be offset by the charitable itemized deduction.  I do not advise making charitable IRA transfers in excess of the required 2010 minimum distribution amount until an extension of the provision is actually enacted.