A special provision that originally expired in 2011 allowed IRA owners who are over age 70½ to take tax free IRA distributions if the distributions were transferred directly from the IRA to a charity. This provision has been retroactively reinstated for 2012 and is extended through 2013.
The funds must be directly transferred to the charity—receiving a cash distribution and sending a check to a charity does NOT qualify. The maximum amount that can be transferred is $100,000. This provision effectively allows an above-the-line deduction for charitable contributions when made out of an IRA. Thus, taxpayers don’t need to itemize to claim a charitable deduction. Additionally, the 50% AGI limit on most cash contributions will not apply. Finally, since it is an above the line deduction, AGI is not increased by the IRA distribution so the distribution does not subject taxpayers to income phaseouts of deductions and credits.
Example: Jim is over 70½ and does not itemize. He takes a $5,000 distribution from his IRA in cash. He then writes a $5,000 check to a charity. He claims the $5,000 distribution in income. He does not benefit from the charitable contribution because he does not itemize. However, if Jim had the IRA trustee directly transfer $5,000 to a charity, Jim’s $5,000 distribution would be tax-free. He essentially has an above-the-line deduction for the charitable contribution.
Extended Deadline to Make a 2012 Charitable Contribution Out of an IRA
Because the law wasn’t reinstated for 2012 until 2013, the IRS is allowing additional time to make a 2012 charitable contribution with IRA distributions. This can be done in two ways:
- A taxpayer can directly transfer an IRA distribution to a charity before February 1, 2013 and can treat it as if it occurred during 2012
- A taxpayer who took a cash IRA distribution during December 2012 can treat it as a qualified charitable distribution if the cash distribution is donated to a charity before February 1, 2013
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230