Tuesday, June 21, 2011

The Old and New IRA Charitable Distribution

You may remember that taxpayers were allowed to distribute $100,000 directly from their IRAs to charity. No deduction was allowed for the contribution, but then the IRA distribution was not included in income. When you also remember that contributions are limited to 50% of income, this rule was very favorable indeed for someone making very generous contributions relative to that year’s income.

This deduction expired in 2010 as Congress played Russian Tax Roulette.

The new tax bill brought it back.

Taxpayers 70 1/2 or older can again make tax-free distributions to a charity from an IRA up to $100,000. These distributions aren't subject to the charitable contribution percentage limits nor are they included in gross income. These rules are good for one year more - through 2011.

Here’s the unexpected part:

In addition, a taxpayer can elect a distribution made in January, 2011 to be treated AS IF it were made on December 31, 2010. Therefore a distribution made in January, 2011 may be (1) treated as made in the taxpayer's 2010 tax year and counted against the 2010 $100,000 limitation, and (2) treated as made in the 2010 calendar year and used to satisfy the taxpayer's minimum distribution requirement for 2010.

The problem here is that prudent tax planning would have required an age 70 ½ taxpayer to have taken his/her2010 required minimum distribution by December 31, 2010. This taxpayer would therefore not need another 2010 distribution, unless he/she simply wanted to maximize charitable contributions. The question has been raised whether a taxpayer who did take a 2010 RMD because of tax law uncertainty can put the monies back in – to “recontribute” the monies. The IRS has just clarified that this cannot be done, as the tax bill did not include this option.

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