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New Opportunities for Charitable Giving From IRAs Under The Tax Relief Act

When Congress avoided the fiscal cliff, it presented new opportunities for charitable giving from IRAs.  Find out how.

The tax law changes at the end of December did more than help the country avoid a further recession. It also gave seniors with IRAs a new opportunity to direct some of their funds to charitable organizations and benefit through decreased taxable income.

What Changed?

While it may not seem like a system of charitable donation tax exemptions could be a system that saves retirees much money, the recent changes can help many people with excess income from IRA withdrawals.

At the age of 70½, individuals with IRAs are required to start making minimum distributions of their retirement funds so that the amounts do not simply accumulate and then get passed along for inheritance and are instead subject to some taxation. In years past, some have chosen to make contributions to charities, amounts which would count toward the individual’s required minimum distribution for the year but would not be subject to income taxation.

Last year, however, those exemptions did not exist, as the IRA charitable rollovers were no longer in effect after the end of 2011. Charitable donation was thus a less attractive option for those spending out of an IRA in 2012.

In addition to helping the nation avoid the so-called “fiscal cliff,” the American Taxpayer Relief Act renewed those exemptions and provided for a temporary opportunity to make retroactive charitable contributions. Whereas a charitable donation last year would have been taxed the same as a normal withdrawal, the new law allows people to make donations of up to $100,000 in IRA funds without income taxation. For a short time, individuals with IRAs can also take advantage of the rollover for 2012. Those who took required minimum distributions at the end of last year will likely consider sending some of that money to charities, as contributions made before February 1 can allow people to take advantage of the exemptions for last year’s taxes.

There are some restrictions on what falls under the category of “qualified charitable distributions,” but in general, public charities and many private charities with no connection to the donor can receive such transfers. One major requirement for the exemption is that the funds must be moved directly from an IRA to the charity, rather than through an intermediate account.

What it Means for You

Because the charitable donations count toward required minimum distributions of IRA funds but not under income that could be taxed for capital gains and dividends, the contributions benefit both the recipient charities and the donors. Several major charities were strong proponents of bringing the charitable donation exemption back after it expired at the end of 2011, and now donors have the opportunity to see lower income tax liability for 2013.

The charitable distribution option is made even more attractive by a new Medicare surtax of 3.8 percent of income, meaning that those who lower their taxable income by donating to charities can also decrease their required Medicare payments.

The change in the law is especially attractive for a variety of people. Those who typically make large amounts of charitable donations and take advantage of tax exemptions in the process figure to benefit from the new law, as the limits that apply to charitable tax deductions (half of total income) don’t apply to this rollover. In addition, those living in states with low or no exemptions can benefit from the charitable distribution rollover.

Of course, the laws passed at the end of 2012 did not provide for long-term changes, so it’s likely that more changes could take place at the end of this year. For now, though, making a charitable donation from an IRA means giving money and keeping some extra for yourself.

If you would like to learn more about the impact of recent changes in the tax laws, please give one of our Vienna, VA based estate planning attorneys a call today.  Click here to contact us.