A remarkable opportunity is contained in the recent American Taxpayer Relief Act of 2012 which became law earlier this month. To claim the gift, you must act quickly – by January 31!
Taxpayers over age 70½, who withdrew money from a Traditional IRA in December of 2012 are able to treat that distribution as completely tax free if by January 31, 2013 they make “Qualifying” charitable contributions amounting to part or all (up to $100,000) of their December 2012 IRA withdrawal. This is referred to as a Qualifying Charitable Distribution (QCD). In exchange for receiving the distribution tax free, those taxpayers forego the itemized deduction of those charitable contributions.
This benefit is only for taxpayers who were over 70½ when they took funds from Traditional IRA in December of 2012. From that group, this offers big tax savings for many, including those who:
A. Do not claim itemized deductions. This strategy gives those individuals the same benefit as if they were able to claim the charitable contribution deduction.
B. Are subject to any of the various negative implications of increased Adjusted Gross Income, especially increased taxability of Social Security benefits, but also reduced medical expense deductions, reduced miscellaneous itemized deductions, reduced eligibility to contribute to Roth IRA, etc.
For purposes of a 2012 QCD, taxpayers can count these charitable contributions:
A. Contributions made in January of 2013, and
B. Contributions made in 2012, on or after the date of their December IRA withdrawal
Caution #1. Certain contributions cannot be counted: Noncash donations such as stocks and mutual funds, as well as gifts to donor-advised funds, gifts to charitable lead trusts, gifts to charitable remainder trusts, and gifts where ANY goods or services are received in return such as a zoo membership or a leather-bound Bible.
Caution #2. This benefit does not extend to withdrawals from SEP, SIMPLE-IRA, 403(b), 401(k), etc. It is only for Traditional IRAs.
Some people would not benefit, including those who have no income tax, and those whose charitable contribution deduction exactly offsets the tax on the IRA withdrawal. However, if you are in any doubt, you should consider going forward with a Qualifying charitable contribution by the end of this month; then at tax time you can decide whether or not to treat the distribution as a QCD.
Bottom line: Taxpayers over age 70½ who withdrew from Traditional IRA in December of 2012 may want to consider increasing their January 2013 charitable contributions to cover a larger-than-usual portion of their planned giving for the year.
Note that for 2013 withdrawals from IRA, taxpayers over 70½ are given this same tax benefit, but only if they have the IRA distribution sent directly from the IRA to the qualifying charity.