Commentary: ‘Incredible’ Tax-Free Charitable IRA Distributions Soon To Sunset

Heads up for those of you out there who are past the “magical” age of 70 ½. An incredible tax break will soon sunset, and you should plan accordingly.

On Jan. 2, 2013, President Barack Obama signed into law the American Taxpayer Relief Act of 2012 and thus extended the provision for tax-free charitable IRA distributions (also known as IRA charitable rollovers) for what may be the very last year.

Key talking points regarding tax-free IRA charitable distributions include:

• Donors must be age 70 ½ or older at the time the IRA distribution is made to a qualified charity.

• Distributions must be made before Jan. 1, 2014.

• The distributions must be made directly from the IRA custodian to a charity or charities. The IRA owner directs the IRA custodian as to the recipient charities and the amounts.

• The amounts distributed from an IRA as qualified charitable distributions are excluded from the AGI (Adjusted Gross Income) of the taxpayer.

• An individual taxpayer may make tax-free IRA distributions of any amount up to a total of $100,000 for 2013. A spouse may also give up to $100,000 from his or her IRA.

• The distributions may be made at any time throughout the year and to as many charities as desired as long as the total does not exceed $100,000 for 2013.

• IRA owners over age 70 ½ are forced to take required minimum distributions. The good news is that qualified charitable IRA distributions are counted up to the $100,000 maximum to satisfy the annual required minimum distribution.

• Qualified charitable distributions may be made from traditional IRAs but not from SEP IRAs or SIMPLE IRAs. However, taxpayers can convert a SEP or SIMPLE IRA to a traditional IRA and then make a qualifying tax-free distribution to their charities.

• The donor does not receive a double tax benefit when making tax-free IRA distributions to qualified charities. That is, because the distribution is excluded from the taxpayer’s AGI, a deduction as a charitable contribution is not also allowed.

• The donor may not receive any goods or services (such as tickets to an event) that would have reduced their charitable deduction had they made an outright gift to the charity. The tax-free treatment of the distribution is at risk if any benefits are received from the charity.

• The charity in receipt of a qualifying charitable distribution from an IRA must provide a “contemporaneous written acknowledgement” or the taxpayer risks losing the tax-free treatment.

Using IRA funds as a source for funding charitable gifts may be very tax-wise for a number of reasons (check with your tax professional) including, but not limited to, these advantages:

• Qualified charitable IRA distributions are not included in gross income and thus will not cause the taxpayer’s AGI to increase. There can be many adverse tax consequences of an increase in AGI including a greater portion of Social Security benefits being taxed, phase-outs of personal exemptions and itemized deductions and potentially higher Medicare Part B premiums.

• Taxpayers whose itemized charitable gift deduction is limited by the 50 percent AGI limit may still make tax-free IRA distributions to charities up to the $100,000 annual limit.

• Taxpayers who do not normally itemize their deductions will benefit from IRA tax-free charitable distributions since they are not included in AGI. Effectively non-itemizers get the benefit of a charitable contribution that they would not have received if they had simply made a contribution directly to a charity.

• Taxpayers who wish to support the charities of their choice can leverage their gifts by making them tax-free from their IRA accounts. The untaxed funds in IRA accounts become the best currency to make charitable contributions since the dollars are not diminished by income taxes.

There is no carryover provision for unused amounts from year to year, and we don’t know if Congress will extend this provision beyond the 2013 tax year. The opportunity to come to the aid of your favorite charitable organizations with pre-tax IRA dollars while excluding the amounts from gross income and satisfying the minimum required distribution rules merits strong consideration if the situation fits.

So for those who qualify, the clock is ticking toward Jan. 1, 2014. Carpe Diem!

“Focus on Financial Planning” is published Sundays. John R. Taylor, Arkansas insurance license No. 32328, is senior vice president of Sterne, Agee & Leach Inc. Sterne, Agee & Leach Inc. is a registered broker/dealer and a member of SIPC. Taylor’s financial updates are heard weekdays from 7-9 a.m. on KFPW-AM 1230, KHGG-FM 103.1 and KOOL 104.7FM. Email: