Set to Expire: Direct Distributions from an IRA to a Qualified Charity

Set to Expire: Direct Distributions from an IRA to a Qualified Charity
From the October 2011 Riker Danzig Tax and Trusts & Estates Update

The direct IRA charitable distribution provision originally included in the 2006 Pension Protection Act and most recently extended as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, is set to expire at the end of this year. This provision gives older taxpayers the ability to exclude up to $100,000 per year from their federal income when they make a "qualified charitable distribution" directly from their IRA. Couples with separate IRAs may exclude up to $200,000 per year.

To qualify for this exclusion from your federal income tax, you must have attained age 70 ½ on the date of the distribution to charity, the distribution must occur on or before December 31, 2011, and the distribution must be directly transferred from the IRA to a public charity (or certain private foundations that make immediate distributions of the contributions). Distributions to a donor advised fund or a supporting organization are specifically excluded from the definition of a "qualified charitable distribution", and therefore do not qualify for this exclusion. Remember, it is imperative that you receive a contemporaneous written acknowledgement of the gift from the charitable donee if the amount of the gift is $250 or more.

Another benefit of this exemption is that the charitable distribution counts toward the donor's annual required minimum distribution that must be withdrawn each year after the IRA owner attains age 70 ½.

Finally, as mentioned above, this extended provision applies to distributions from traditional IRAs.[1] Also, as mentioned in our December 2008 Tax and Trusts & Estates UPDATE, any distribution from an IRA that would otherwise be considered income for New Jersey Gross Income Tax purposes will continue (at least at this point) to be taxed as pension and annuity income on your New Jersey Income Tax Return (Form NJ-1040), even if those funds constitute a "qualified charitable distribution" for federal income tax purposes.

There is a very short window of opportunity to take advantage of this incentive. If you need assistance finalizing the transfer before the end of the year, please contact us.


[1] Although the provision also applies to Roth IRAs, there would be little tax reason to distribute a Roth IRA to charity, since Roth distributions are tax-free to non-charitable distributees. Also, 401(k) plans, 403(b) annuities, defined benefit and defined contribution plans, profit-sharing plans, etc., are not eligible.