It’s Not Too Late to Make Tax-Free IRA Distributions to Charity for 2012

The 2012 American Taxpayer Relief Act extended the ability to make tax-free IRA distributions to charity until December 31, 2013 for qualified donors (age 70 ½ and older).  These distributions, up to $100,000, are not treated as taxable income to the donor but are still counted towards the required minimum distributions (RMDs) for the year, as long as they are made directly to the charity.  The best part of this is that qualified donors do not have to wait until the 2013 tax year to take advantage of this extension thanks to a pair of special elections:

Special Election for December 2012 Distributions

A taxpayer over age 70 ½ has the option of “reclassifying” any portion of an IRA distribution already made to be treated as a qualified charitable distribution.  This special election only applies to amounts distributed from your IRA during December of 2012, and you must transfer the money to charity before February 1, 2013.  In other words, since the law didn’t exist during December 2012, the IRS is allowing you to transfer money to a charity now (in January 2013) as long as you have taken an IRA distribution of at least that much in December of 2012.  The donation is then treated as if it were transferred directly to the charity, thus qualifying for tax-free status.

For example, Mary is over age 70 ½, and withdrew $55,000 from her traditional IRA on December 20, 2012, to satisfy her required minimum distribution for 2012.  Mary can give any portion (or all) of the $55,000 to charity until January 31, 2013, and elect to treat that portion as tax-free, but still satisfying her RMD for 2012.

Special Election for January 2013 Distributions

Similar to 2010-2011, when they passed the law very late in the year, any qualified charitable distributions made during January 2013 can be treated as if it were made during December 2012.  If the taxpayer so elects, it will count against the 2012 $100,000 limitation on the exclusion and satisfy the 2012 RMD requirements.  Unlike the special December 2012 election, this transfer has to be made by the IRA trustee directly to an eligible charity.

Looking Forward to 2013

Not only does the IRS provide two avenues to take advantage of this tax break for 2012, they’ve extended the rule into 2013.  2013 provides an added incentive, though:  Because of other changes in the tax law for 2013 and beyond, higher-income taxpayers are going to see the benefit of their charitable contribution deductions limited.  That makes the benefit of this rule even more pronounced.  By making a donation directly from your IRA, you are fully eliminating income taxation on that IRA distribution and getting the maximum tax benefit for your donation.  If done outside of the IRA, the IRA distribution would be fully taxed but the offsetting deduction for the charitable donation might be limited.

If you have an IRA, are over 70 ½, and contribute to charity, you should contact your investment advisor to find out how to make your donation directly if you’re not already doing so.  If you have any further questions, contact us at and we’ll be happy to help.

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