January 31 Deadline to Transfer IRA Funds to Charities and Have It Count for 2012

by Holland & Knight LLP

The American Taxpayer Relief Act of 2012 (the "Act") extends for two more years — 2012 and 2013 — a popular provision that enables an IRA owner to make gifts to charity directly from his or her IRA account without causing the distributions to be included in income. This provision was first created in 2006 but expired at the end of 2011.

As before, the rule applies only to IRA owners at least 70-1/2 years old, and permits transfers up to $100,000 per year in 2012 and 2013. Amounts transferred from the IRA to charity will count in satisfying the minimum required distribution for the applicable year. The transferee charity must be a publicly-supported charity — not a supporting organization, a private foundation or a donor-advised fund.

For a variety of reasons, this often benefits the donor more than if he or she withdrew the money from the IRA, included it in his or her income and then made the charitable contribution.

But there's one problem: The Act didn't become law until January 2, 2013. How can it help you for 2012? The answer is that the Act permits IRA owners age 70-1/2 or older to treat transfers to qualified charities made by January 31, 2013 as if they were made by December 31, 2012. The donor must be 70-1/2 as of December 2012 to qualify. Transfers will count in determining whether donors have met required minimum distribution rules for 2012.

Here's how you can benefit from this rule if you act by January 31 and follow the required procedures:

  1. If you waited until December 2012 to withdraw your RMD. Suppose you delayed taking your required minimum distribution (RMD) from your IRA until late in 2012, hoping the rule would be extended. When December came and Congress still hadn't made a decision, you finally concluded it was necessary to withdraw your RMD amount to avoid a penalty. If the withdrawal took place in December 2012, you (assuming the other qualifications are met) may give that money to a qualifying charity in January 2013 and have it treated as if it were a direct transfer in 2012. You won't get a tax deduction for 2013 as a result of this contribution, but you will be able to exclude the amount from your 2012 income — which may be of more benefit to you. But if you took the RMD prior to December, this rule won't apply to you.
  2. If you somehow failed to withdraw your RMD during 2012. Suppose you did not, for some reason, take the RMD you were required to take from your IRA in 2012. You're in luck, because you can have your IRA custodian transfer that amount (up to the applicable limit) to a qualified charity in January 2013, and you will be deemed to have complied with the 2012 RMD requirement.
  3. If you want to maximize the benefits to your favorite charity in a tax-advantaged way. Suppose you took your RMD early in 2012 but are still interested in supporting your favorite qualifying charities as much as you can in a tax-advantaged way. If you direct your IRA custodian to make a transfer directly to the charity in January 2013, you can treat that as a 2012 transfer, and then you can repeat the process at any other time during 2013 and treat it as a 2013 transfer. This way, you can transfer a total of $200,000 from your IRA to the charity without taking any of it into income, by having $100,000 count for 2012 and a like amount for 2013. And, if a husband and wife (both age 70-1/2) have separate IRAs, each one may use this provision up to the full limit, so a couple could transfer as much as $400,000.

The Bottom Line

Given the higher tax rates that will apply in 2013 and the limitation on itemized deductions that will affect some higher-income donors, it is important to take maximum advantage of every provision that accomplishes your objectives. There is a brief window of time — until January 31, 2013 — to claim a tax benefit that will help you for 2012 and help your favorite qualifying charity as well.

Please contact us if you need more information.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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