Revival of the Direct Charitable IRA Transfer

by Reeve E. Chudd

The new Fiscal Cliff legislation, H.R.8, the “American Taxpayer Relief Act” (“ATRA”) extends the Direct Charitable IRA Transfer treatment through December 31, 2013. This means that Donors age 70½ or older can ask their IRA custodian to transfer up to $100,000 in 2013 to a public charity. The transfer will be a totally income tax-free transfer and thus equivalent to a 100% charitable deduction which is not subject to the normal charitable giving limit of 50% of adjusted gross income (“AGI”). There is of course no separate charitable deduction for the tax-free transfer to the public charity. As you may recall, this particular benefit was introduced in the Pension Protection Act of 2006.

The amount of a Direct Charitable IRA Transfer applies against the Minimum Distribution Requirement (“MDR”) of IRA’s.

Under ATRA, there is also an opportunity in January of 2013 to make a 2012 Charitable IRA Transfer gift if the donor received an IRA distribution in December of 2012. Because Congress did not extend the direct Charitable IRA Transfer provision during 2012, ATRA states that donors may treat a 2012 IRA distribution made after November 30, 2012 as a 2012 Charitable IRA Transfer gift to the extent that the recipient of the December distribution makes a charitable gift of the December distribution to a qualified charity before February 1, 2013. This means that a donor who received an IRA mandatory distribution or other distribution during December of 2012 (when most of my clients take their MDR) may choose to make a charitable gift in January of 2013 to a qualified charity and it will be treated as a 2012 Charitable IRA Transfer donation. The normal rules apply: the donor must be at least age 70½ and the amount must be $100,000 or a lesser amount and the gift must be made to a public charity.

One more thing comes to mind at this time. ATRA also reintroduced the income tax related personal exemptions phased-out (PEP) and the so-called Pease limit on itemized deductions (named after its author, former Ohio Democratic representative Don Pease). The Pease limit, now made effective for 2013 and after, applies so that the total amount of a taxpayer’s itemized deductions is reduced by 3% of the amount by which the taxpayer’s adjusted gross income (AGI) exceeds the threshold amount ($300,000 for a couple, $250,000 for single taxpayer), with the reduction not to exceed 80% of the otherwise allowable itemized deductions. These dollar amounts are inflation-adjusted for tax years after 2013. Here’s what this means for our charitable clients:

1. For donors who have AGI of near the threshold amount ($300,000 for joint returns and $250,000 for single filers), adding their MDR on top of that income will mean the reduction of their itemized deductions, whereas using the Direct Charitable IRA Transfer will avoid this.

2. For donors with AGI already in excess of the threshold amount, using the Charitable IRA Transfer will (a) give them an equivalent of a full 100% deduction (which would otherwise be reduced if made from other sources), and (b) will not increase AGI which in turn will not increase the amount of reduction in other deductions.

While using the Charitable IRA Transfer may not create tax savings of tsunami proportions, for charitable donors, saving a few thousand never hurts.