"Fiscal Cliff" Law Temporarily Extends Certain Donations for 2012
Qualifying direct charitable IRA distributions made in January can count toward 2012.

The so-called "fiscal cliff" law just passed by Congress and signed by President Obama, formally known as the "American Taxpayer Relief Act" (the Act), includes a little-publicized provision providing a very short window of opportunity for eligible taxpayers to make direct charitable distributions from their IRAs in January of 2013 and count them as made on December 31, 2012.

The Act also contains a relief provision for eligible taxpayers who took distributions from their IRAs in December of 2012 (not knowing that the direct charitable IRA distribution exclusion would be retroactively renewed). The Act allows those taxpayers to exclude those distributions from their taxable income (within the prescribed limits) so long as they transfer the distributed funds to a qualified charity by the end of January 2013.

These rules relate to the fact that the Act re-extends through 2013 the exclusion for direct charitable IRA distributions by taxpayers 70½ years old and older. That exclusion had expired as of December 31, 2011. The renewal is retroactive and covers 2012. Given the fact that the renewal of the provision did not occur until January of 2013, Congress is allowing taxpayers a temporary window through January 31, 2013, during which taxpayers may make direct charitable IRA distributions (within the prescribed limits) and treat them as having been made on December 31, 2012.

The Act also provides leniency for distributions made from an IRA to a taxpayer in December of 2012, if the funds are subsequently transferred by the taxpayer to an eligible charitable organization by January 31, 2013 (and the transfer otherwise meets the criteria for exclusion).

Nonprofit organizations, including churches, that are eligible recipients of direct charitable IRA distributions should consider notifying their donors of this limited opportunity immediately.

Sample text for such a notification appears at the end of this article.

A refresher on the direct charitable IRA distribution exclusion

The direct charitable IRA distribution exclusion allows qualified distributions from an IRA to be excluded from the taxable income of a donor. Such treatment is favorable to certain donors since distributions from a regular IRA are ordinarily taxable and the donor's ability to deduct a charitable contribution may be limited based on his or her specific circumstances. Additionally, such treatment permits the donor to have a lower adjusted gross income, which may be beneficial for other reasons.

Nonprofit organizations, including churches, wishing to attract such gifts need to be aware of the following special conditions and restrictions that apply under the law:

  • The donor must be 70½ or older on the date of the transfer;
  • The transfer must be made directly by the IRA's trustee to the donee organization (subject to the limited and temporary exception described above);
  • The donor may not receive any goods or services in exchange for the gift (or any part of the gift);
  • The donee organization must generally be a U.S.-based 501( c )(3) organization and may not be a supporting organization, a donor-advised fund, or a nonoperating private foundation;
  • The exclusion is limited to $100,000 per year;
  • The exclusion is now scheduled to expire on December 31, 2013;
  • If an IRA from which a distribution is made includes both deductible and nondeductible payins, the deductible payins are considered to be used first; and
  • The donor must obtain a proper charitable contribution acknowledgment prior to filing his or her tax return for the year of the distribution.

Let's take a closer look at a few of the stipulations listed above.

Direct transfer required. Subject to the very limited temporary exception described above for distributions made in December of 2012 and transferred to an eligible charity by January 31, 2013, the donor must have the IRA custodian or trustee make the transfer directly from the IRA account to the donee organization. The donor may not take a distribution personally and then contribute it to the charity without triggering taxation of the distribution. This is a very important requirement for which nonprofit organizations and churches should watch when encouraging such gifts from donors.
Only certain 501( c )(3) organizations qualify. Another subtle provision in the law that may be easily missed is the stipulation that the donee organization may not be a supporting organization, a donor-advised fund, or a private nonoperating foundation. While most nonprofit executives would know whether their organization maintains donor-advised funds or is a private foundation, many leaders may not know if their organization is a supporting organization. A supporting organization (described in Section 509(a)(3) of the Internal Revenue Code) is a type of 501( c )(3) organization that, by its nature, exists to support one or more other nonprofit organizations. A classic example of a supporting organization is a fundraising foundation that supports a specific "parent" nonprofit organization, such as a church, a school, a college, or a museum. Supporting organizations are not qualified recipients of direct charitable IRA distributions.
Donor must receive proper acknowledgment of contribution. In order for a direct charitable IRA transfer to be excludible from a donor's taxable income, the transfer must meet the requirements that would otherwise apply for a deductible charitable contribution. (Note, however, that with a qualified direct charitable IRA transfer, the donor does not actually get a charitable deduction; he or she gets to exclude the distribution from taxable income instead.) The ordinary rules for charitable contributions require a donor to obtain a proper acknowledgment from the donee organization for individual gifts of $250 or more. The donor must have the acknowledgment before filing his or her tax return for the year of the gifts. Accordingly, a donor must have a proper acknowledgment for a direct charitable IRA distribution before filing his or her tax return for the year of the distribution. The acknowledgment should indicate the name and address of the donee organization, the name of the donor, the specific dates and amounts of the gifts, and a statement that no goods or services were provided in exchange for the gifts. (Note that receipt by the donor of any goods or services that would reduce the deductible amount of an ordinary charitable contribution will disqualify a direct charitable IRA distribution.) While not specifically stated in the law, and subject to possible future federal regulations that may state otherwise, our firm recommends that the donee organization acknowledge and specifically identify any gifts that are direct IRA distributions separately from regular charitable contributions.

Sample text for notifying donors

Subject/Header:

Provision in "Fiscal Cliff" Law Provides Very Limited Window of Time for Donors to Make Direct Charitable IRA Distributions in January of 2013 and Count Them as Made in December of 2012

Dear ___:
The so-called "fiscal cliff" law just passed by Congress and signed by President Obama, formally known as the "American Taxpayer Relief Act" (the Act), includes a little-publicized provision providing a very short window of opportunity for eligible taxpayers to make direct charitable distributions from their IRAs in January of 2013 and count them as made on December 31, 2012. The Act also contains a relief provision for eligible taxpayers who took distributions from their IRAs in December of 2012 (not knowing that the direct charitable IRA distribution exclusion would be retroactively renewed). The Act allows those taxpayers to exclude those distributions from their taxable income (within the prescribed limits) so long as they transfer the distributed funds to a qualified charity by the end of January 2013.
These rules relate to the fact that the Act re-extends through 2013 the exclusion for direct charitable IRA distributions by taxpayers 70½ years old and older. That exclusion had expired as of December 31, 2011. The renewal is retroactive and covers 2012. Given the fact that the renewal of the provision did not occur until January of 2013, Congress is allowing taxpayers a temporary window through January 31, 2013, during which taxpayers may make direct charitable IRA distributions (within the prescribed limits) and treat them as having been made on December 31, 2012. The Act also provides leniency for distributions made from an IRA to a taxpayer in December of 2012, if the funds are subsequently transferred by the taxpayer to an eligible charitable organization by January 31, 2013 (and otherwise meets the criteria for exclusion).
Some taxpayers who meet the criteria for making direct charitable distributions from their IRAs may realize a substantial tax benefit by taking advantage of this unique and very limited opportunity. For taxpayers who qualify, up to $100,000 per taxpayer may be excluded from income under this provision of the law for each year that it applies. If you believe that such a gift may be appropriate for you, we encourage you to promptly consult with your tax advisor and IRA custodian, as this limited window of opportunity in the tax law expires at the end of this month. Also, please let us know if we can help you facilitate such a gift in any way by contacting _______ at _____________________.
Thank you for your regular and continued support of _______.

This guest post first appeared in The Nonprofit Watchman, a free e-newsletter published by Batts Morrison Wales & Lee, P.A., that covers significant state and federal developments for nonprofits and their executives. Reprinted with permission.

The 2013 Church & Clergy Tax Guide, available for pre-order at YourChurchResources.com, covers key tax law developments for 2012 and 2013.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is published with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations

Comments

Displaying 1–1 of 1 comments

Allison Watkins

January 10, 2013  3:17pm

Do people make charitable contributions from their IRA? I had no clue. That's cool I guess.

Report Abuse
Recent Posts
Subscribe to Church, Law & Tax

Resources

High Risk Student Activities

High Risk Student Activities

Keep your youth safe, and have meaningful experiences during high adventure and high risk activities.
Juvenile Offenders in the Church

Juvenile Offenders in the Church

How to protect children from juveniles who sexually abuse other children.