Reinstatement of Charitable Distributions from the IRS

Written by: Christy Rakoczy

IRA’s or Individual Retirement Accounts are investment accounts that people can put money into tax free. The money in an IRA is intended to be used to provide financial support and income during retirement. However, some people have more money than they need in their IRA and they want to donate the money by distributing the funds directly to a charity. This has long been permitted for those ages 70.5 or older and the distributions were referred to as a Qualified Charitable Distribution. The distributions could be made directly to any 501(c)3 charity. However, the ability to make these charitable donations expired in 2012 and democrats and republicans caught in ongoing budget wars were not able to pass a law allowing for the qualified charitable distributions to continue.

The issue became part of something called the Fiscal Cliff, which was a series of automatic tax increases and spending cuts that was expected to go into effect on December 31, 2012 and that was projected to have a crippling effect on the economy. Although America did briefly go over the Fiscal Cliff, however, a last minute deal was worked out and voted on by congress and signed into law by the president. The deal was reached on January 1, 2013 and was called the American Taxpayer Relief Act. The Act reinstated the ability of elderly Americans to make direct distributions to 501(c)3 charities from their IRA accounts and the Act was applied retroactively.

The American Taxpayer Relief Act and Qualified Charitable Distributions

Under the reinstated rules for charitable distributions, Americans are permitted to make a gift to a charity of up to $100,000 per year directly from their IRA. Those making the gift are not taxed on the income that they give to the charity and they do not take a tax deduction for the donation (unlike traditional donations that are made with post-tax money but that are tax deductible).

Because the qualified charitable distribution rules were not reinstated until January 1, 2013, those wishing to make charitable contributions were allowed to make distributions in early 2013 and have them applied to 2012. In other words, the rules were applied retroactively and Americans got to apply their donations retroactively so they could give, which they might not have done earlier due to the fact that there was no mechanism in place to allow for these direct contributions until the American Taxpayer Relief Act.

There are two different options for those who want to go back and make a donation for 2012. Donors can make their qualified distribution to a charity between January 1 and February 1, 2013 by having their IRA trustee transfer funds directly to the charity. Any money transferred before February 1 is counted for 2012. Individuals could also contribute funds between January 1 and February 1, 2013 equal to distributions taken between November 30, 2012 and December 31,2012. So, money that a person took out of his IRA before November 30 and December 31, 2012 could be contributed to a charity and it would be treated as if it had been a direct qualified transfer to a charity.

The IRS recommended detailed record keeping for those making charitable contributions and taking advantage of the retroactive tax rules.


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