Fiscal Cliff Law Extends IRA Donation Tax Break: Can You Benefit?


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Human Resource & Payroll Services And Solutions - Houston, Dallas, Austin - Texas 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.

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Fiscal Cliff Law Extends IRA Donation Tax Break: Can You Benefit?

  1. 1. Toll Free: 877.880.4477 Phone: 281.880.6525Fiscal Cliff Law Extends IRA Donation Tax Break: Can You Benefit?
  2. 2. » If youve 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.
  3. 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 youve made any nondeductible contributions over the years).» Unlike garden-variety charitable donations, you cant claim itemized deductions for QCDs. That is okay, because the tax-free treatment of QCDs equates to a 100 percent deduction -- because youll never be taxed on those amounts, and you dont have to worry about any of the tax-law restrictions that apply to itemized charitable write-offs.
  4. 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 its 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 youve reached 70 1/2.
  5. 5. Annual Limit of $100,000Theres a $100,000 limit on total QCDs for any one year. But if both youand your spouse have IRAs set up in your respective names, each of you isentitled to a separate $100,000 annual QCD limit, for a combined total of$200,000, even if you file jointly.
  6. 6. Tax-Saving AdvantagesThere are at least four potential tax-saving advantages to this strategy.1 QCDs are not included in your adjusted gross income (AGI). This lowers1 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 of2 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.
  7. 7. 3 Lets say you own one or more traditional IRAs to which you have made3 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 for4 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.)
  8. 8. Mind the January 31 Deadline for Retroactive 2012 QCD OptionsAs stated earlier, the fiscal cliff legislation retroactively restored thequalified charitable distributions privilege for 2012. To take advantage ofthe 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 fromyour 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 madepayable 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 youpersonally, you cannot treat the payout as a tax-favored QCD. So dont let thathappen! (If youve not yet taken all or part of your 2012 IRA required minimumdistributions, you can count these January of 2013 QCDs towards meeting your2012 required minimum distribution obligation.)
  9. 9. Option 2:You can contribute up to $100,000 of IRA distributions that were paid toyou last month (December of 2012) to IRS-approved charities and thentreat those distributions as 2012 QCDs. However to take advantage of thisoption, you must transfer the money to one or more eligible charities by nolater than January 31. (You may have taken some December IRAdistributions to satisfy your IRA required minimum distribution obligationfor 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 treatthem as being made for the 2013 tax year. As such, they will count towardsmeeting your 2013 required minimum distribution obligation.
  10. 10. Should You Consider Roth QCDs?Generally, the answer is no. Why? Because you and/or your heirs can takefederal-income-tax-free Roth IRA withdrawals after at least one Rothaccount owned by you has been open for at least five years. Also, fororiginal account owners (as opposed to account beneficiaries), Roth IRAsare not subject to the required minimum distribution rules until after youpass on. Because the tax rules for Roth IRAs are so favorable, its generallybest to leave Roth balances untouched for as long as possible rather thantaking money out for QCDs.Conclusion:The QCD strategy is a tax-smart opportunity for well-off seniors withphilanthropic inclinations and more IRA money than they need forretirement. However, the January 31 deadline for the retroactive 2012options is looming. If you have questions about your QCD options or wantmore information, contact your tax adviser.
  11. 11. 14550 Torrey Chase, Suite 100 Houston, TX 77014 USA Toll Free : 877.880.4477 Phone : 281.880.6525 Fax : 281.866.9426 E-mail :