Taxpayers with IRA balances incur income when they are required to take minimum distributions from their IRAs. Oftentimes, the minimum distributions can be quite large, if their IRA has a large balance from a rollover of pension assets to the IRA.
If the taxpayers don’t need the funds, they may want to contribute them to charity (since the minimum distribution rules require the participants to receive them). They will still incur income from the IRA distribution, but then hope to offset the income with a charitable deduction. Since the Internal Revenue Code contains limitations and phase-outs on the charitable deduction, they may not be able to completely offset the income.
Since 2006, Congress has allowed, on a temporary basis, direct payments to charities from IRAs of up to $100,000 per year. Such a direct payment bypasses the above problem, since the payment is not taxed to the IRA participant at all (and thus the charitable deduction is not needed to avoid income). This provision has expired and then been renewed several times. Most recently, it expired at the end of 2011.
Under the American Taxpayer Relief Act of 2012 ("ATRA"), Congress has again extended this provision, retroactive to January 1, 2012, but only through 2013. As part of the provision, a special feature of ATRA will allow a taxpayer to make a direct contribution in January 2013 and have it treated as a 2012 contribution to be applied to the 2012 $100,000 limitation. This allows the taxpayer to make another distribution in 2013 under a second $100,000 annual limitation. Taxpayers who want to take advantage of this provision will need to complete the transfer by January 30, 2013.
Note that these rules only apply to IRAs and not other qualified plans. They also apply only to taxpayers who are over age 70 1/2. Taxpayers interested in using these provisions should consult with their tax advisor to assure that other applicable limitations do not apply.
Normally, these direct contribution rules require that the IRA payment pass directly to the charity – that is, they cannot pass through the participant’s hands (or bank account). However, ATRA also has a special rule that is applicable only to December 2012 IRA distributions. Participants who received an IRA distribution in December can treat it as a direct contribution to a charity for these purposes, if the participant pays over the funds to a charity by January 30, 2013.
These provisions of ATRA are welcomed by charities and taxpayers alike. What would be even more welcome would be a permanent implementation of the direct contribution rules, instead of rolling two year extensions (which often occur after the prior period has expired).