Unique Opportunity for Charitable Giving in January 2013

The American Taxpayer Relief Act of 2012 (“ATRA”) creates a unique opportunity for charitable giving. If a taxpayer acts during January 2013, taxpayers who have attained age 70 1/2 may make a tax-free distribution (commonly referred to as a “charitable rollover”) from their IRA to charity of up to $200,000.

In general, distributions from IRAs must be included in gross income in the year in which distribution occurs, and income taxes must be paid on the taxable portion. The advantage here is that a qualified charitable distribution (“QCD” or charitable rollover) is not included in income.

The new tax law reinstates the ability of a 70 1/2 year old individual to make a tax-free IRA distribution or rollover to a charity of up to $100,000 in 2013. The tax law applicable in 2012 did not permit this, it was last available in 2011. The unique opportunity we have now is that during January 2013 (January only), an individual can rollover an additional $100,000 and have it treated as though it were rolled over in 2012. You and your spouse can each make a $100,000 QCD for a total of $200,000 if you file a joint tax return, doubling up for a total of $400,000 in tax-free IRA distributions to charity in 2013.

The donee organization cannot be a non-operating private foundation, a supporting organization or a donor-advised fund, and the individual cannot receive any consideration for the distribution. Distributions from employer-sponsored retirement plans such as SIMPLE IRAs and SEPs do not qualify.

The new ATRA rules for 2012 and 2013 are:

1. An individual who received an IRA distribution during the month of December 2012 may transfer a portion not exceeding $100,000 in cash to a qualified charity before February 1, 2013, and the distribution will be excluded from 2012 income. This option is available only for the month of January 2013.

2. Or, during January 2013, an individual may request that up to $100,000 be transferred directly from his or her IRA to a qualified charity before February 1, 2013 and have that amount excluded from 2012 income.

3. During the remainder of 2013, individuals are also permitted to direct a distribution from an IRA of up to $100,000 to a qualified charity and exclude that amount from 2013 income. In effect, this permits taxpayers who elected the options in (1) or (2) above to transfer a total of $200,000 to charities from their IRA and to exclude the entire $200,000 from income ($100,000 in 2012 and $100,000 in 2013).

Absent the QCD, some taxpayers could achieve the same result by including the IRA distribution in gross income, donating the distribution to a charity and taking an itemized charitable deduction for the donation. However, taxpayers who do not itemize their tax deductions would not benefit as they do from the QCD. Many older taxpayers choose to claim the standard deduction, especially since they often have no mortgage interest to deduct. By using a QCD these taxpayers won’t miss out on a deduction for charitable giving.

Taxpayers whose charitable contributions exceed 50% of their gross income can benefit from the rollover, since this technique does not rely on the charitable deduction which contains the 50% percentage limitation.

Not having to declare the income from the IRA withdrawal may also be beneficial if it would cause an increase in Medicare premiums or taxable Social Security income.

Effective January 1, 2013, ATRA has reinstated the “Pease limitation,” (named after former Congressman Donald Pease ) which had been eliminated for the 2011 and 2012 tax years. That limitation caps the amount of certain itemized deductions, including the charitable deduction, that an individual may take if his or her adjusted gross income exceeds a certain threshold amount called the “applicable amount.” The new law has set the applicable amounts as $250,000 for a single individual, $300,000 for a married couple filing a joint return, and $275,000 for head of household. If a taxpayer’s adjusted gross income exceeds the applicable amount, the taxpayer’s itemized deductions will be reduced by the lesser of (i) 3% of the amount that a taxpayer’s adjusted gross income exceeds the applicable amount, or (ii) 80% of all itemized deductions that are subject to the Pease limitation for the tax year.

For a high-income donor who makes a large gift to charity, the Pease limitation may significantly reduce the amount of itemized deductions that a donor might otherwise be able to take. Using the charitable rollover can avoid these limitations.

Individuals looking to “double up” on IRA charitable rollovers – and contribute up to $200,000 of IRA assets tax free to one or more charities – can do so if they act quickly. Git ‘er done before February 1, 2013.