I had a call last week on what the rules are for the 70 ½ IRA owner making a direct distribution to a charity.
You may recall that – if you are a certain age – you can make distributions – up to a limit - from an IRA directly to a charity. The age is 70 ½ and the limit is $100,000. Why would you do this? There are several reasons:
(1) The first, of course, is that you are charitably inclined and have the means to do so.
(2) Second, the distribution counts toward your minimum required distribution (MRD). You have to pull the money out anyway.
(3) Third, you get to omit the distribution from income.
This doesn't increase your adjusted gross income, which could have bad side effects (such as raising your Medicare premiums).
(4) Fourth, there is no charitable deduction.
Which is OK, as you leave-off both the income and the deduction. In fact, you are ahead in a state that does not allow for itemized deductions.
What is the issue here? The issue is that the IRA/charity option was one of those tax law provisions extended with the most recent tax bill - the one signed in January 2013. People may have intended to make a direct distribution to charity but did not do so, waiting for clarification on 2012 tax law.
There is a surprise in the tax bill. You can still write a check by January 31, 2013 to a charity and have it count toward 2012. Let's say that you took out $26,000 from your IRA in December and made contributions of $10,000 before year-end. You can write checks for the balance ($16,000) and recast the entire $26,000 as a direct distribution in 2012.
2013 becomes 2012? I am thinking time travel, and that makes me think of....
What if you distributed in 2012? There are two possibilities:
(1) You distributed directly to the charity
This is the best answer. You leave both the income and deduction off your return.
(2) You distributed to yourself
Oh oh. There are again two possibilities:
(1) You distributed to yourself in December
As long as you write a check to charity by January 31, the IRS will consider this a direct distribution in 2012.
(2) You distributed to yourself before December
There is nothing you can do. You will have income and a corresponding deduction. Hopefully there will be no harm, no foul. In Ohio, however, there is harm, as Ohio does not allow for itemized deductions.
There will be yet another consideration in 2013. Remember the new ObamaCare taxes (the 0.9% Medicare and the 3.8% investment income)? Those kick-in at $200,000 or $250,000 of income, depending on whether one is single or married. Now you have a very real reason to leave that IRA distribution off your income for 2013. You DO NOT WANT your adjusted gross income to hit that $200,000 or $250,000 stripe.
About the author
Steven D. Hamilton is a career CPA, with extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.