IRA investors who wish to donate some of their retirement savings to a charity are now eligible to make tax-free transfers that will count toward tax year 2012, if they act quickly. Individuals age 70 ½ or older have until January 31, 2013 to make a direct transfer to an eligible charity. And people who received IRA distributions in December 2012 may contribute part or all of the amount received to a charitable institution tax-free.
[Read: Retirement Tax Deadlines for 2012.]
The American Taxpayer Relief Act of 2012, passed on January 2, 2013, extended a provision that allows older IRA account owners to donate their IRA withdrawals to charity through tax years 2012 and 2013. Transferring an IRA distribution to a charity allows retirees to avoid paying income tax on the amount withdrawn, and these qualified charitable distributions can be used to satisfy IRA required minimum distributions. Qualifying distributions may be made by individuals age 70 ½ and older in amounts of up to $100,000 per year.
Retirement savers are required to begin withdrawing money from their IRAs after age 70 ½, and must generally pay income tax on the amount withdrawn. However, this provision of the law allows retirees to instead redirect their required distribution, up to $100,000, to a charity, and then no income tax is due on the withdrawal.
Charitable distributions generally must be paid directly from the IRA to a qualified charity by the end of the calendar year. However, for tax year 2012 only, IRA owners can report charitable distributions made in January 2013 on their 2012 tax return. And retirees who received IRA distributions in December 2012 can contribute part or all of the amount withdrawn to an eligible charity in cash during January 2013 and have it count as a 2012 qualified charitable distribution. “IRA owners should keep records to substantiate the timing of contributions and distributions regarding any 2012 qualified charitable distributions made in January 2013,” according to the IRS.
Tax-free charitable IRA distributions first became available in 2006, but expired at the end of 2011 until the tax bill extended this option. While the IRA money distributed to a charity is not taxable, no additional tax deduction can be claimed for the charitable contribution.
Even if you don’t act fast enough to take advantage of the retroactive 2012 charitable contribution option, there is still plenty of time to make a donation for tax year 2013. Distributions made directly from your IRA to a charity at any time in calendar year 2013 can be used to satisfy your 2013 required minimum distribution and to reduce your income tax bill.