It's the season of giving, much of it as donations to charitable groups.
In many cases, donations to charities can help individuals reduce their tax bills. Folks who itemize deductions can claim their charitable gifts on Schedule A and use the amount to lower their adjusted gross income.
But older people have another tax-saving charitable giving option. Taxpayers over age 70 1/2 can make tax-free transfers from an IRA directly to a charity.
They face a Dec. 31 deadline, too, and this year could be the last chance for this type of tax-saving transaction.
Charity meets retirement
This transaction doesn't provide any itemized deduction benefit, but that's OK for these taxpayers.
They are meeting their required minimum distribution responsibilities and also avoiding paying any tax on the money.
This situation is the convergence of two tax laws, the charitable deduction and the required minimum distribution, or RMD.
The RMD is the amount required by tax law to be withdrawn from individual retirement accounts and other tax-deferred vehicles such as 401(k) plans when the account holder reaches 70 1/2. These accounts have been earning money untouched by taxes for years and the IRS finally wants to start collecting on them.
The RMD is a percentage of the money that must be withdrawn. It is figured using one of three life-expectancy tables based on the account owner's marital status. The most commonly used is the Uniform Lifetime Table.
When the appropriate RMD is made, the taxpayer then must report that money as income and pay tax on it along with any other retirement income. But the older IRA owner can avoid the tax bill on an RMD of up to $100,000 as long as the required amount is transferred directly, trustee to trustee, to an IRS-qualified charity.
This is appealing to individuals who don't need the RMD money and have a charity they support.
No deduction, no problem
The one downside is that the money transfer is not tax deductible to the IRA owner. But that's not a problem in many cases. A lot of older taxpayers who must pay taxes, like the majority of taxpayers of all ages, claim the standard deduction instead of itemizing. Since they don't itemize, the donation would not be of any tax-deduction use to them anyway.
The IRA-to-charity rollover rule has been in the tax code since 2006, but it's what is known as an "extender." These are temporary tax laws that expire and must be renewed by Congress to stay in force.
The IRA rollover rule died at the end of 2012 but was renewed on Jan. 2 as part of the American Taxpayer Relief Act. Because of the lateness of the law's enactment, older IRA owners were allowed to make a 2012 rollover in January 2013.
The rollover option and other extenders are likely to die on Dec. 31. It's unclear when or if Congress will renew them in 2014.
So if rolling over your 2013 RMD, which in most cases also must be taken by Dec. 31, is appealing to you, contact your IRA manager now to put that charitable gift transaction into motion.
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Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and co-author of the e-book "Future Millionaires' Guidebook."