Your clients who would like to make a gift to a charity directly from their individual retirement account this year may have to think twice before donating. The tax code provision that allowed IRA owners to contribute up to $100,000 directly from their IRA to the qualified charity of their choice–without recognizing the donation as income–expired at the end of 2011, and Congress has given no indication if it will be renewed.
Your clients need to know the rules as they stand now, or they could be in for an unpleasant surprise during next year’s tax season.
The Pre-2012 Donation Rule
As it existed through December, the “donation rule” worked as follows: an owner of an IRA who was over 70½ could directly transfer IRA funds to the charity of his or her choice without counting the donation as income. Because IRA owners who have reached age 70½ are required to withdraw a certain amount, called a minimum distribution, from their IRA assets each year and count this as taxable income, the donation rule was attractive to clients who wished to minimize income.
Minimizing income is a goal for many IRA account owners aged 70½ and older. Increased levels of income can push retirees into higher tax brackets for Social Security tax purposes, and can also make them liable for higher Medicare payments. Until the end of 2011, it was possible to exclude the entire required minimum distribution from income, assuming that the IRA owner’s annual minimum distribution requirement was below $100,000 and he or she donated the entire amount.
The taxable gifts were not deductible under the pre-2012 provision, but the income-reducing benefits made it a smart choice for many IRA owners.
Donating IRA Funds in 2012 and Beyond