Making tax-free transfers from your IRA to a charity

In 2011, there was a provision in the law which allowed one to make direct transfers from one’s IRA to a charity.  By doing so, one could satisfy his RMD requirements while avoiding paying taxes on that transfer.  Moreover, it was a better tax break than if you’d taken the distribution in cash (taxable income, increases your AGI) and then made a check out to the charities (a deduction only if you itemize on schedule A — which is less likely for older, lower-income folks, especially if they’ve already paid off their mortgage).

That provision expired at the end of 2011.  All through 2012, there was uncertainty as to whether it would be re-instead (retroactively) for the year.  Hopes were high, but like so many things, it didn’t happen by the end of 2012.

Then came the dreaded Fiscal Cliff and the fix that was passed to undo so many of the expiring tax provisions.

One of them was a temporary re-instatement of the direct-to-charity IRA transfer.  Unlike many of the things which came about in the Fiscal Cliff Fix, however, this one (a) needed to be somehow retroactive, since the provision expired at the end of 2011, not 2012; and (b) this one was only made temporary – until the end of 2013.

Since the law wasn’t in effect in 2012, when one needed to have made these transfers, the fix included some complexity and timing in order for one to be able to take advantage of it for 2012.  Transfers one made in 2012 the *hope* of it being fixed are now officially and retroactively ok.  Cash taken out of the IRA in December of 2012, if donated to charity in January 2013, will qualify.  And, finally, if you held off and never made your required minimum distribution in 2012 (again, in the hopes that this fix would come), you may still make your 2012 distribution during January 2013 and avoid the 50% penalty on missed RMDs.  (Yes, you read that right – the penalty for missing an RMD is 50% of the amount of the RMD you didn’t take.  Do NOT miss your RMDs!)

As usual, Kiplinger has a great column about this issue:

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