Qualified Charitable Distribution Transition Rule

January 11, 2013

The American Taxpayer Relief Act of 2012 (ATRA) extends the tax treatment of qualified charitable distributions from IRAs, so that they are available for 2012 and 2013. Because this law wasn’t enacted until January 2013, it includes a special transition rule. You can take advantage of this rule retroactively for 2012, but only if you act before the end of January 2013.

Qualified charitable distributions are amounts paid directly from an IRA that’s maintained for an individual over the age of 70½ to a qualifying charity (not all charities qualify for this rule). When all requirements are met, you don’t pay tax on the IRA distribution, but you also don’t deduct the charitable contribution. You may benefit from this method of charitable giving in some situations, such as when you don’t itemize, or when you’re subject to state income tax in a state that doesn’t allow a deduction for charitable contributions.

There are two special transition rules relating to late enactment of the law extending this provision. The one that is most likely to be helpful applies if you took a distribution from your IRA during December 2012. Many individuals who might otherwise have had their required minimum distribution paid directly to a charity instead took the RMD in cash because the special rule for qualified charitable distributions expired at the end of 2011. The new law says the rule that normally requires payment directly from your IRA to a qualifying charity doesn’t apply if you took a distribution in December 2012 and transfer it (or part of it) in cash to a qualifying charity by the end of January 2013.

The other special rule says that if you make a qualified charitable distribution during January 2013 you can elect to treat it as a qualified charitable distribution for 2012. For most people it doesn’t matter which year they make a qualified charitable distribution, because it doesn’t affect income tax: you don’t report income for the distribution or a deduction for the charitable contribution. However, qualified charitable distributions are limited to $100,000 per year. If you would otherwise exceed this limit for 2013, you can increase the amount that qualifies by treating January transfers as if they were made in 2012.