Rule allowing tax-free IRA distributions of up to $100,000 if donated to charity, is retroactively extended through 2013
Did you happen to not meet your IRA’s required minimum distribution (RMD) requirements for 2012? Not to worry – you have until February 1, 2013 to avoid the near 50% penalty tax, AND benefit a nonprofit (instead of Uncle Sam) in doing so. Read on to find out how:
The Taxpayer Relief Act of 2012 extends the tax-free qualified charitable distribution rules for two years (through 2013). Included are special provisions for distributions made in December 2012 as well as those made January 2013, as discussed and illustrated below.
For IRA distributions made during 2012 and 2013, the Internal Revenue Code continues to allow for tax-free treatment of up to $100,000 of distributions from IRAs that are donated to a charity. A “qualified charitable distribution” is any otherwise taxable distribution from a traditional IRA or a Roth IRA that is:
- Made directly by the IRA trustee to a Code Sec. 170(b)(1)(A) charitable organization (other than a Code Sec. 509(a)(3) private foundation or a Code Sec. 4966(d)(2) donor advised fund); and
- Made on or after the date on which the individual for whose benefit the IRA is maintained (i.e., the IRA owner) has attained age 70 ½.
Charitable Distributions Count Towards Required Minimum Distribution
For purposes of the required minimum distribution (RMD) rules as they apply to individual retirement accounts and individual retirement annuities, qualified charitable distributions may be taken into account to the same extent that the distribution would have been taken into account under the RMD rules had the distribution not been directly distributed under the IRA qualified charitable distribution rules. Thus, an IRA owner who makes an IRA qualified charitable distribution in an amount equal to his RMD for the tax year is considered to have satisfied his minimum distribution requirement for that year, even though a charitable entity (and not the IRA owner) is the recipient of the distribution.
PLANNING TIP: Taxpayers age 70 ½ or older may exclude from gross income up to $100,000 of their qualified charitable distributions for each tax year beginning in 2012 and 2013 (in addition to any qualified charitable distributions they may have made through 2011).
Special election for December 2012 distributions
Under a special rule, for purposes of both (i) the tax-free qualified charitable distribution rules, and (ii) the RMD rules as they apply to IRAs, any portion of an IRA distribution made to the taxpayer after Nov. 30, 2012, and before Jan. 1, 2013 (i.e., during Dec. 2012), may be treated as a qualified charitable distribution, if the IRA owner so elects at such time and in such manner as IRS will prescribe, to the extent that the portion is:
- Transferred in cash after the distribution to an eligible charity before Feb. 1, 2013; and
- Part of a distribution that would otherwise satisfy the tax-free qualified charitable distribution rules, but for the fact that the distribution was not transferred directly to an eligible charity. (2012 Taxpayer Relief Act §208(b)(2)(B))
PLANNING TIP: The special election for Dec. 2012 distributions provides a limited exception to the general rule that charitable transfers must be made by the IRA trustee directly to an eligible charity.
Illustration #1: Peter is an individual who is over age 70 ½, and the owner of a traditional IRA. On Dec. 12, 2012, Peter received a $75,000 distribution from the IRA.
Under the special rule for Dec. 2012 distributions, Peter can elect to transfer to an eligible charity any amount of cash up to $75,000, and the amount transferred will be treated as a tax-free qualified charitable distribution, as long as Peter makes the charitable transfer no later than Jan. 31, 2013.
Special election for January 2013 distributions.
Under another special rule, for purposes of both (i) the tax-free qualified charitable distribution rules, and (ii) the RMD rules as they apply to IRAs, any qualified charitable distribution made after Dec. 31, 2012, and before Feb. 1, 2013 (i.e., during Jan. 2013), will be deemed to have been made on Dec. 31, 2012, if the IRA owner so elects at such time and in such manner as IRS will prescribe. (2012 Taxpayer Relief Act §208(b)(2)(A))
PLANNING TIP: At the taxpayer’s election, a qualified charitable distribution made in Jan. 2013 is permitted to be treated as made in 2012, and thus permitted to (a) count against the 2012 $100,000 limitation on the exclusion, and (b) be used to satisfy the taxpayer’s RMD for 2012.
PLANNING TIP: For purposes of the special election for Jan. 2013 distributions, the IRA distribution must be made by the IRA trustee directly to the eligible charity, unlike the exception to the direct transfer rule provided under the special election for Dec. 2012 distributions, above.
Illustration #2: John is an individual who is over age 70 ½, and the owner of a traditional IRA. During 2012, he did not take any distributions from the IRA, even though he was required to take a $100,000 minimum distribution for 2012. On Jan. 18, 2013, John directs the IRA trustee to make a $100,000 charitable transfer.
Under the special rule for Jan. 2013 distributions, John can elect to treat the $100,000 charitable transfer as having been made on Dec. 31, 2012. If John makes the election (pursuant to rules that IRS is to prescribe), he will be (i) considered to have satisfied his minimum distribution requirement for 2012, and (ii) entitled to make another tax-free charitable transfer of up to $100,000 in 2013.
For questions about the extended and special IRA distribution rules, call our office today to schedule an appointment to speak with one of our estate planning retirement specialists. 303.793.3400.
————————————————————–
Submitted by: Anna E. Lineberger, Esq.
