Direct Distributions from IRAs to Charity Reauthorized

January 3, 2013

The American Taxpayer Relief Act of 2012 (“ATRA”) reauthorized the direct distribution from IRAs to charities. This provision expired at the end of 2011. Under this rule an IRA owner can authorize a direct payment from the IRA to charitable organizations of up to $100,000 each year, and the payment does not count as income. It does not count as a charitable contribution deduction either, but the advantage is that it reduces a taxpayer’s income for purposes of the numerous provisions of the code applying to higher income taxpayers.

ATRA extended this provision through the end of 2013. It also extended the provision for tax year 2012, but since the law was not passed until 2013, this is a bit like changing the rules of the game after the game is over.

There is, however, a wrinkle in the law which permits direct charitable distributions to be counted for 2012 even though the year ended without the law in place, as long as the gifts are made by the end of January.

The special rules apply in two circumstances: The law provides that IRA owners can elect to have any qualified charitable distribution made during the month of January 2013, to be treated as made on the last day of 2012. How to make the election is not known at present. For many IRA owners who take their required minimum distributions for 2013 after the first of the year, the required minimum distribution for 2012 can still be directly distributed to charity if it is done in January.

The second special rule applies to amounts distributed from IRAs during December of 2012. If a distribution was made in December of 2012 and cash gifts were made to qualified charities prior to February 1, 2013, the IRA owner can elect to count any portion of the distribution as a direct charitable distribution from the IRA. Presumably, the date of the charitable contribution must be after the date of receipt of the IRA distribution for the law to apply.

In both cases, the amount given to charity counts against 2012’s $100,000 cap, and there is another $100,000 available for 2013.

For 2013, the reauthorization of the direct charitable distribution will be particularly valuable to higher income taxpayers. In addition to the rate increase for high income taxpayers, ATRA brought back the reduction of itemized deductions and personal exemptions for married taxpayers earning more than $300,000 and single taxpayers earning more than $250,000. If you fall into this category, you would be well advised to make a direct charitable distribution in 2013 instead of taking retirement plan distributions in income and then deducting charitable contributions.