Human Resource & Payroll Services And Solutions - Houston, Dallas, Austin - Texas www.hrp.net. The new "fiscal cliff" tax law includes an extension of a tax-saving opportunity for some affluent IRA owners who want to pass some of their wealth onto favorite charities. Here are the details about who can take advantage of the opportunity, as well as how to arrange qualified charitable distributions and an important January 31 deadline.

1. Toll Free: 877.880.4477
Phone: 281.880.6525
Fiscal Cliff Law Extends IRA Donation
Tax Break: Can You Benefit?
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2. » If you've reached 70 1/2 and have more IRA money than you really need,
the recently passed fiscal cliff legislation allows you to make cash
donations to IRS-approved charities out of your IRA.
» These so-called qualified charitable distributions (QCDs) have been
allowed in past years, but the privilege expired at the end of 2011.
Thankfully, the new law retroactively brings them back for 2012 and
extends them for 2013.
» However you must take action by January 31, 2013 to benefit from the
retroactive options for 2012.
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3. Basics on IRA Qualified Charitable Distributions
» Qualified charitable distributions (QCDs) are allowed to be taken out of
your traditional IRA without owing any federal income tax. In contrast,
other traditional IRA distributions are taxable (wholly or partially
depending on whether you've made any nondeductible contributions
over the years).
» Unlike garden-variety charitable
donations, you can't claim itemized
deductions for QCDs. That is okay,
because the tax-free treatment of
QCDs equates to a 100 percent
deduction -- because you'll never be
taxed on those amounts, and you
don't have to worry about any of the
tax-law restrictions that apply to
itemized charitable write-offs.
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4. A QCD must meet all of the following requirements.
 It must be distributed from an IRA, and it cannot occur before you, as
the IRA owner or beneficiary, are 70 1/2.
 It must meet the normal tax-law requirements for a 100 percent
deductible charitable donation. If you receive any benefits that would be
subtracted from a donation under the normal charitable deduction rules,
(such as tickets to an event), the distribution cannot be a QCD. Beware
of this rule!
 It must be a distribution that would otherwise be taxable. A Roth IRA
distribution can meet this requirement if it's not a qualified
(meaning tax-free) distribution. However, making QCDs out of Roth IRAs
is generally inadvisable for reasons explained later.
Key Point: If you inherited an IRA from the deceased original account owner,
you can do the QCD drill with the inherited account if you've reached 70 1/2.
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5. Annual Limit of $100,000
There's a $100,000 limit on total QCDs for any one year. But if both you
and your spouse have IRAs set up in your respective names, each of you is
entitled to a separate $100,000 annual QCD limit, for a combined total of
$200,000, even if you file jointly.
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6. Tax-Saving Advantages
There are at least four potential tax-saving advantages to this strategy.
1 QCDs are not included in your adjusted gross income (AGI). This lowers
1
the odds that you will be affected by various unfavorable AGI-based
rules, such as those that can cause more of your Social Security
benefits to be taxed, less of your rental estate losses to be deductible,
and more of your investment income to be hit with the new 3.8
percent Medicare surtax. QCDs are also exempt from the rule that says
your itemized charitable write-offs for the year cannot exceed 50
percent of your AGI (any donations disallowed by the 50 percent-of-
AGI limitation are carried forward for up to five years).
2 A QCD from a traditional IRA counts as a distribution for purposes of
2
the required minimum distribution rules. Therefore, you can arrange to
donate all or part of your 2013 required minimum distribution amount
(up to the $100,000 limit) that you would otherwise be forced to
receive and pay taxes on.
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7. 3 Let's say you own one or more traditional IRAs to which you have made
3
non-deductible contributions over the years. Your IRA balances consist
partly of a taxable layer (from deductible contributions and account
earnings) and partly of a nontaxable layer (from those non-deductible
contributions). Any QCDs are treated as coming straight from the
taxable layer. Any non-taxable amounts are left behind in your IRA(s).
Later on, those non-taxable amounts can be withdrawn tax-free by you
or your heirs.
4 QCDs reduce your taxable estate, although that is less of an issue for
4
most folks now that the federal estate tax exemption has been
permanently set at $5 million, adjusted for inflation. (The inflation-
adjusted exemption for 2013 is $5.25 million, up from $5.12 for 2012.)
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8. Mind the January 31 Deadline for Retroactive 2012 QCD Options
As stated earlier, the fiscal cliff legislation retroactively restored the
qualified charitable distributions privilege for 2012. To take advantage of
the retroactive deal, you have two options.
Option 1 for January 2013 IRA QCDs:
You can choose to treat up to $100,000 of charitable donations made from
your IRA during this month (January of 2013) as having been made in 2012.
The money must be distributed directly by the IRA trustee to an eligible IRS-
approved charity. Alternatively, the trustee can send you a check made
payable to an eligible charity, and you can then forward it to the charity.
Either way is permitted. However if a distribution check is made out to you
personally, you cannot treat the payout as a tax-favored QCD. So don't let that
happen! (If you've not yet taken all or part of your 2012 IRA required minimum
distributions, you can count these January of 2013 QCDs towards meeting your
2012 required minimum distribution obligation.)
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9. Option 2:
You can contribute up to $100,000 of IRA distributions that were paid to
you last month (December of 2012) to IRS-approved charities and then
treat those distributions as 2012 QCDs. However to take advantage of this
option, you must transfer the money to one or more eligible charities by no
later than January 31. (You may have taken some December IRA
distributions to satisfy your IRA required minimum distribution obligation
for last year.)
Whether you take advantage of these retroactive 2012 QCD options or not,
you can take up to another $100,000 worth of QCDs this year and treat
them as being made for the 2013 tax year. As such, they will count towards
meeting your 2013 required minimum distribution obligation.
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10. Should You Consider Roth QCDs?
Generally, the answer is no. Why? Because you and/or your heirs can take
federal-income-tax-free Roth IRA withdrawals after at least one Roth
account owned by you has been open for at least five years. Also, for
original account owners (as opposed to account beneficiaries), Roth IRAs
are not subject to the required minimum distribution rules until after you
pass on. Because the tax rules for Roth IRAs are so favorable, it's generally
best to leave Roth balances untouched for as long as possible rather than
taking money out for QCDs.
Conclusion:
The QCD strategy is a tax-smart opportunity for well-off seniors with
philanthropic inclinations and more IRA money than they need for
retirement. However, the January 31 deadline for the retroactive 2012
options is looming. If you have questions about your QCD options or want
more information, contact your tax adviser.
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Toll Free : 877.880.4477
Phone : 281.880.6525
Fax : 281.866.9426
E-mail : info@hrp.net
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