In 2006, Congress added a new provision to the tax laws that allowed taxpayers to make contributions to charitable organizations directly from their IRA accounts without having to report the contribution as income and without regard to the restrictions that otherwise apply to charitable contributions and itemized deductions. This tax break originally was scheduled to last for 2 years but Congress has extended it, in fits and starts, with the most recent extension taking place in the final hours of 2012. However, this provision is scheduled to expire on December 31st of this year and many observers are not optimistic that it will obtain a last minute reprieve at year-end.
To take advantage of this special tax break, the charitable contributions involved must be made directly from the taxpayer’s IRA to charity. Contributions from the IRA to the IRA owner and then to charity do not qualify. Similarly, contributions from regular and Roth IRAs qualify but contributions from 401K plans and other retirement plans do not. In addition, the owner of the IRA must be at least age 70 ½ at the time of the contribution to charity. Finally, the contribution must be made to a qualifying charity—contributions to supporting organizations and donor advised funds are not eligible, and contributions to foundations generally will not qualify.
If these rules are met, the amount contributed to charity from the taxpayer’s IRA will be excluded from the taxpayer’s income but will count towards the required minimum distribution that the taxpayer must take from the IRA each year. The taxpayer will not be entitled to claim a charitable contribution for the amount contributed to charity.
The benefits of this special provision are capped at $100,000 per taxpayer, not per IRA. As a result, if a taxpayer has several IRAs, the amount that can be contributed to charity under this provision is limited to $100,000 per year in the aggregate from all IRAs involved. The IRA owner cannot take advantage of this provision unless he obtains a contemporaneous written acknowledgement of the contribution from the charity.
The beneficiary of an IRA also is eligible to utilize this provision following the death of the original IRA owner provided the beneficiary is age 70 ½ or older at the time of the contribution.
This tax break is likely to be of most help to taxpayers with large IRAs who do not need all of their IRA funds for retirement. These individuals often are subject to limitations on the amount of charitable and/or itemized deductions that they can deduct when they make their charitable contributions from their own assets. In addition, withdrawing funds from their IRAs to make their charitable gifts can push them into higher income tax brackets and subject more of their Social Security payments to tax. This soon-to-expire tax break eliminates these adverse tax consequences and can be a more tax-efficient way to give to charity between now and year-end.