Charitable IRA rollover: Jan. 31 deadline
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Attention, philanthropic senior citizens. Just when it looked like you lost your chance in 2012 to directly donate your annual required minimum distribution to your favorite charity, you get a second chance.
But act soon. The option for the 2012 tax year will expire at 11:59 p.m. Jan. 31.
And the special tax treatment only applies to individual retirement account distributions made in December 2012.
Charitable IRA rollover background
Since 2006, IRA owners age 70 1/2 and older have been able to transfer up to $100,000 from their retirement account, be it a traditional or a Roth, to a qualified charity.
The charitable donation option is particularly valuable for traditional IRA owners who don’t need the account money to live on, but who must take out a required minimum distribution, or RMD, each year once they reach that septuagenarian deadline.
By donating the RMD directly to a charity, the IRA owner meets the annual withdrawal rule but doesn’t have to count that money as income for tax purposes.
The charitable IRA rollover, however, is a temporary tax law, and it officially expired on Dec. 31, 2011. Still, many believed Congress would reauthorize the law for 2012, albeit late in the year as was the case in 2010.
“We had talked to clients about holding off as long as possible,” says Jason Lina, CFA, CFP professional and lead adviser with Resource Planning Group in Atlanta. “In the past, Congress has enacted this provision very late in the year, so we encouraged these clients to wait.”
But with 2012 winding down and Congress still fighting over tax legislation, many IRA owners decided to take their annual required distributions. If they hadn’t, they would have faced a penalty of 50 percent of what they should have withdrawn.
In the case of Lina’s clients, they pulled the RMD trigger around Christmas. “By that time, we didn’t expect Congress would do anything that would allow time to make the choice,” he says.
Then Congress did act, reauthorizing the IRA rollover as part of the “fiscal cliff” tax bill, officially known as the American Taxpayer Relief Act. The only problem was the bill didn’t pass until Jan. 1 and didn’t become law until the next day.
Lawmakers, however, were looking back. In addition to putting the law back in the tax code for 2013, the bill makes the rollover retroactive to the 2012 tax year.
And knowing that many charitably inclined older IRA owners, such as Lina’s clients, waited until the last minute of 2012 to take their RMDs, lawmakers added a provision to the new law that offers donors a chance to essentially recharacterize those distributions as charitable donations.
2013 donations for 2012 tax year
An IRA owner can contribute in January to a qualified charity the same amount of cash, up to the maximum $100,000, taken as an RMD in December and have that donation amount count as if it had been taken from the retirement account Dec. 31, 2012.
That date redesignation effectively means that the late 2012 RMD does not count as taxable income to the account holder.
The two months of December and January are key here.
If someone took an RMD on Nov. 30, 2012, or earlier, that amount cannot be converted to a charitable donation.
And if you don’t make the offsetting charitable donation by Jan. 31, then it cannot be used to counter a December 2012 RMD.
Lina is now recharacterizing the December RMDs for some of his clients.
Paul Gevertzman, an attorney, CPA and tax partner at the New York City accounting firm Anchin, Block & Anchin LLP, says his office took a leap of faith at the end of 2012 when it came to RMD donations.
“We did the direct transfer last year in hope that it would be reinstated,” says Gevertzman. “The clients got to take the RMD and, if Congress didn’t act, weren’t any worse off.” The RMD would have counted as income, and the charity to which it went would have counted as a deductible donation.
But charitable account owners who in December 2012 took RMDs themselves and then made donations to their favorite charities that month aren’t as lucky.
“If they want the RMD to not count as income, they must give the same amount as the RMD in January and then recharacterize it (as direct to the charity),” says Gevertzman. That means a double donation to the charity.
Other IRS rules apply
As with any donation, you must get a receipt. While you can’t deduct your IRA rollover, you’ll need the documentation to verify that you made the gift and to prove to the Internal Revenue Service that the charity meets IRS standards if it asks.
And although you won’t owe taxes on the charitable rollover, you still must report it on your 2012 tax return.
Your IRA custodian will send a Form 1099 reporting the full charitable IRA rollover distribution. At tax-filing time, enter that amount on line 15a of Form 1040, and on line 15b, simply enter “QCD” to indicate the withdrawal was a qualified charitable distribution.
Get ready to report it again in 2014. The IRS says that a 2012 QCD made in January 2013 must also be reported on the IRA owner’s 2013 Form 1040, due next year. You’ll get instructions on how to do just that, says the IRS, in the 2013 instructions for Form 1040.
You also should talk with your tax adviser about any possible state tax implications of a charitable IRA rollover.
“There are at least 10 states that don’t allow itemized deductions and others that start limiting deductions,” says Gevertzman. So in some states, he says, “If you’re picking up the income and you give it to charity, the states are actually taxing you for the charitable donation.”
The state tax considerations might not change your mind about directly donating your RMD, but you should at least be prepared for what it might mean to your state tax bill.
And there’s one piece of good news for folks who prefer to donate their RMDs to charity. The American Taxpayer Relief Act renewed it through 2013, so you don’t have to worry about another December full of tax-law uncertainty — at least not about charitable IRA rollovers and not this year.