Reprinted by permission of Renner & Company, CPA, P.C.
The American Taxpayer Relief Act of 2012 extended the
qualified charitable distribution provisions for 2013. This allows
donors to donate directly from their IRAs to qualified charities. If you
have donors who are age 70 ½, they are probably eligible for tax
savings by donating to your charity directly from their IRAs.
How To Use This Information for Your Charity
Proactive Charities will want to get this information to their donor
base and potential donors as soon as possible. The provision currently
expires December 31, 2013, so don’t delay.
- Review the information below and determine if you have contributors or potential contributors who are age 70 ½.
- Educate your donors and potential donors about this tax benefit.
Include it in your next appeal letter. Suggest that they consult with
their individual tax advisors regarding the tax benefit that may be
available to them by making their contributions to your organization
directly from their IRAs.
- Encourage your donors and potential donors who wish to do so, to
contact their IRA trustees and provide transfer instructions as
described below.
The Basics: IRA Required Minimum Distribution
The IRS will not allow taxpayers to maintain retirement funds
indefinitely. Once taxpayers reach age 70 ½ they must take required
minimum distributions from their IRAs. You may have donors that do not
need these distributions, and do not want to increase their tax by
taking them. There is no way around taking the distribution, but there
is a way to avoid the tax. Taxpayers who donate their distribution
directly to a qualified charity may exclude the distribution from their
income.
How Donors Benefit from Qualified Charitable Distributions
- The IRA distribution contributed to charity never hits taxable
income. Required minimum distributions usually increase adjusted gross
income, affecting taxable income in a number of ways. Higher income
increases limits on itemized deductions. Higher income also raises the
amount of social security benefits subject to tax. IRA distributions
donated directly to charity are excluded from income. This results in a
lower adjusted gross income, and possibly lower taxable social security
benefits, and lower tax.
- The charitable donation income limits do not apply. Taxpayers are
usually only allowed to deduct up to 50% of their adjusted gross income
in charitable contributions. Donors who take taxable IRA distributions
and then choose to make charitable contributions have to consider that
those contributions are only deductible up to 50% of adjusted gross
income. Donors who make their charitable contributions directly from
their IRAs exclude the entire contribution from tax.
- There’s no need to itemize deductions to benefit. Taxpayers can only
receive a benefit from charitable contributions if they itemize their
deductions on Schedule A of their individual returns. However, an amount
donated directly from an IRA can be excluded from adjusted gross
income. In this case, if the donor does not have enough deductions to
qualify for itemized deductions, they still get a benefit without having
to itemize.
- If an individual has an inherited IRA and they have reached age 70 ½
then they can still take qualified charitable distributions from the
inherited IRA.
How Donors Can Maximize Contributions
A donor is allowed to exclude from gross income up to $100,000 for
qualified charitable distributions made each year. Spouses may each
contribute up to $100,000 for qualified charitable distributions from an
IRA. Therefore on a joint tax return there could be a total of $200,000
excluded from adjusted gross income. If donors also contribute
additional amounts besides those distributed from their IRA, those
additional amounts may be included on Schedule A of the 1040 as
charitable contributions. The additional contributions may not exceed
50% of their adjusted gross income without considering the $100,000
allowed for IRA distributions. Therefore, on a joint return an
individual may exclude $100,000 for each spouse from their adjusted
gross income for IRA distributions and then also contribute to charity
up to 50% of their adjusted gross income.
How to Donate
Donors should contact their IRA trustee and have them transfer the
money directly to the charity. The trustee can issue a check in the name
of the charity and allow the donor to deliver it to the charity. The
distribution cannot be made payable to the individual, it must go
directly from the IRA trustee to the charity.
Tax Reporting
Donors will receive a Form 1099-R from their IRA trustee for
distributions made in 2013. Qualified Charitable Distributions will be
included in total distributions but will be excluded from taxable
distributions. “QCD” should be listed next to the taxable amount so that
the IRS is aware there are amounts that were excluded from tax as a
result of a charitable distribution deduction.
Taxpayers will report total IRA distributions on the first page of
their individual returns where it says IRA distributions (line 15a for
the 2012 tax return) and the taxable portion will be listed on the next
line. The taxable portion is the total amount of IRA distributions that
were not donated to charity.
The charity should provide a receipt to the donor. The donor must
keep this receipt with his or her records to support the contribution.
Summary
If you have donors who are age 70 ½ they may be receiving required
minimum distributions from an IRA. If they’re already contributing to
your charity, it’s likely that you can save them some tax by suggesting
that they make their donations directly from their IRA accounts.
Proactive charities will want to get this information to their donor
base and potential donors as soon as possible. Your donors will
appreciate the information. The provision currently expires December 31,
2013, so don’t delay.
© 2013 Renner and Company, CPA, P.C. All Rights Reserved.
