Under IRC §408(d)(8), IRA owners over age 70 ½ can distribute up to $100,000 per year directly to charity and never recognize any income on the distribution. But to get this benefit, you must act fast because the law expires at the end of this year.
The ability to distribute from your IRA directly to a charity is better than taking a regular distribution and then making a charitable contribution for two reasons:
First, it avoids possible application of income limitations on charitable contribution deductions under IRC §170(b), which generally limit deductions to 30 percent of a taxpayer’s adjusted gross income.
Second, the distribution won’t increase the taxpayer’s adjusted gross income for purposes of the 3.8 percent Medicare tax on net investment income under IRC §1411, which kicks in around $200,000 ($250,000 for married couples filing jointly). This part is new for 2013.
The additional income also could trigger the 3 percent phase-out of itemized deductions under IRC §68, but this kicks in at a higher level and the resulting tax (about 1 percent) is quite a bit less.
Note that the distribution cannot be made to a supporting organization under IRC §509(a)(3) or a donor advised fund under IRC §4966(d)(2).
But to get these benefits, you have to act fast. The tax provision is set to expire on December 31, 2013. Last year it was retroactively extended for a limited period, but you never know if Congress will act again this year.
Good luck, and Happy New Year!
For a complete discussion of charitable IRA transfers, see California Estate Planning §21.48.
Related CEB blog posts:
- IRS is Very Strict When It Comes to Charitable Contribution Rules
- Charitable Giving and Getting
- 10-Steps for Developing and Implementing an Estate Plan, Part I
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