Provision for Direct IRA Distributions to Charity Extended with Tax Elections Available for Actions Taken in January 2013

The American Taxpayer Relief Act of 2012 (ATRA) was passed by Congress on January 1, 2013 and signed by Pres. Obama on January 2, 2013.  ATRA retroactively reinstated for 2012 and extended through 2013 the prior law provision enabling certain direct charitable distributions from an Individual Retirement Account (IRA).

Under the provision, those age 70 ½ or older may instruct their IRA custodian or trustee to pay a distribution of up to $100,000 per year directly to a public charity (e.g. the check cannot be made payable to the IRA owner) that is not a donor advised fund or a supporting organization.  Furthermore, no benefits can be provided by the charity to the IRA owner in exchange for the donation (e.g. dinner) or else the entire donation will not qualify for this provision.  A tax-qualified receipt must also be obtained from the charity.  The distribution is excluded from gross income but the donation is not counted as a charitable deduction (no double benefit).  This strategy provides two main benefits:  (1) excluding the distribution from gross income lowers the amount of adjusted gross income (AGI) upon which so many tax increases are based (e.g., taxable portion of Social Security benefits), and (2) the charitable distribution is counted towards meeting the required minimum distribution (RMD) for the year.  The traditional and the Roth IRA are eligible under this provision.  However, the SEP IRA and the SIMPLE IRA are not eligible.  Using a Roth IRA to make a direct charitable distribution usually does not make tax sense because qualified Roth IRA distributions are tax exempt.  Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.

Because this provision wasn’t extended until January 2013, a couple of special elections are provided to deal with the retroactive reinstatement to 2012.  However, action must be taken in the month of January 2013 if you intend to use one or both of these special elections!

1.     If you received an IRA distribution in December 2012 (e.g., in order to meet your 2012 RMD), you can make a cash donation of any portion of the distribution amount to charity by January 31, 2013 and elect to treat that portion of the December 2012 IRA distribution as if it were a 2012 qualified, direct charitable IRA distribution.

2.     You can make a qualified, direct charitable IRA distribution during the month of January 2013 and elect to treat the distribution as if it had been made on December 31, 2012.  This election could address situations where you were waiting for Congress to extend this provision before the end of 2012, and either you missed taking the full amount of your 2012 RMD (and would therefore be subject to a penalty) or you didn't make a 2012 charitable IRA distribution because the law expired in 2011.  Furthermore, another direct charitable IRA distribution can be made in 2013 for the 2013 tax year, effectively permitting a second charitable IRA distribution in 2013.

The IRS just provided some guidance regarding the impact of the second election.  If a January 2013 direct charitable distribution is made, and the election is made to treat it as having been made on December 31, 2012, then such distribution can only be counted towards satisfying your 2012 RMD and not your 2013 RMD.  However, for purposes of computing the amount of your 2013 RMD, the distribution must be subtracted from your December 31, 2012 IRA balance.