Older taxpayers were watching closely during last December's tax bill debate. They wanted to know if they could still roll money from their traditional IRA into a charity.
The answer, finally delivered on Dec. 17, 2010, when the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 became law, was yes. Rollovers from IRAs to qualified nonprofits are OK.
This option is a great tax break for older individuals who don't need the money from their retirement accounts to pay daily living expenses. But, because they are 70½ or older, they have to take a certain amount of cash out of their traditional IRA each year under the Required Minimum Distribution, or RMD, rule. This is the Internal Revenue Service's way of making sure that it finally starts collecting taxes on those accounts that have been earning tax-deferred money for years and years and years.
With the IRA-to-charity choice, they can have their RMD sent directly to their favorite charity. Actually, they can donate even more than their required distribution, up to $100,000, if they wish. Taking the money from the retirement account satisfies the IRS distribution requirement, but because a charity, not the account holder, gets it, the money doesn't count as taxable income for the IRA owner.
The IRA rollover option first appeared in 2006. But like many tax breaks, it was temporary; Congress had to reauthorize the tax law every year or so. The option expired at the end of 2009. In the big tax extension bill enacted in December, the rollover rule was reinstated for 2010 and 2011.
Because of the lateness of the law that re-established the rollover option for 2010, the IRS subsequently ruled that eligible IRA account holders could make such a direct donation by this Jan. 31 and have it count for the 2010 tax year. That's a good deal if you didn't take your 2010 RMD by Dec. 31 of last year.
But some older IRA owners, unsure what Congress might do and fearing steep penalties if they didn't take their annual RMD by the end of last year, took their distributions before the new law passed.
Once the law took effect, they hoped they would get some retroactive relief allowing them to essentially "take back" their RMD and then roll it over to a charity for the 2010 tax year. That hope was bolstered with the Jan. 31 date announcement from the IRS.
But as with most things taxes, it's not that simple.
The IRS is holding firm that IRA amounts that must be distributed during a particular year under the required distribution rules are not eligible for the extended rollover treatment.
However, in a Jan. 12 announcement, the IRS said that if an IRA owner last year received more than the required distribution amount, the owner can roll the excess to another or the same IRA within 60 days of receiving the distribution and then have the funds paid directly to the qualified charity as a qualified charitable distribution.
And if you have the money and it makes financial sense for you, you have another option in connection with the upcoming Jan. 31 deadline. Make two IRA-to-charity rollovers this year, one in the next few days so you can count it toward 2010, and then your regular 2011 distribution.
Of course, you need to talk with your financial and tax advisers before making any money moves. But this situation and the IRS ruling definitely give you something to discuss.