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Extension of Tax-Free IRA Distributions to Qualified Charities

By Amy J. Krier

For the last several years, a special tax law allowed individuals age 70 ½ or older to direct up to $100,000 of income tax-free IRA distributions to qualified charities during each year from 2006 through 2009. However, this provision expired on December 31, 2009. Recently, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”), signed into law on December 17, 2010, extended this provision for 2010 and 2011.

Similar to the prior tax law, the Act allows an individual who is at least age 70 ½ at the time of the IRA distribution to direct up to $100,000 of income tax-free IRA distributions to one or more qualified charities during each of 2010 and 2011. Since the Act was enacted at the end of 2010, there is a special rule that allows an individual to elect on his or her 2010 federal income tax return to treat the income tax-free IRA distributions made no later than January 31, 2011, as income tax-free IRA distributions for the 2010 tax year. Therefore, an individual could make up to $200,000 of income tax-free IRA distributions to one or more qualified charities during 2011, as long as the 2010 income tax-free IRA distribution of $100,000 is distributed by January 31, 2011, and the 2011 income tax-free IRA distribution of $100,000 is distributed by December 31, 2011.

In order for an individual to make an income tax-free IRA distribution to a qualified charity for 2010 or 2011, it must meet the requirements for a “qualified charitable distribution.” The following is a summary of the requirements and rules for qualified charitable distributions made by an individual for 2010 and 2011:

  • The individual must be at least age 70 ½ at the time of the IRA distribution.
  • The individual may direct up to $100,000 of IRA distributions to qualified charities during each of 2010 and 2011.
  • For married couples, each spouse may direct up to $100,000 of IRA distributions to qualified charities during each of 2010 and 2011.
  • The individual may elect to treat a $100,000 IRA distribution as being made for the 2010 tax year if the distribution is completed no later than January 31, 2011. The individual has until December 31, 2011 to complete the IRA distribution for the 2011 tax year.
  • The check for the IRA distribution must be issued by the IRA custodian payable directly to the qualified charity. Therefore, if an individual plans to make an IRA distribution by January 31, 2011 and elect to treat the distribution as being made for the 2010 tax year, he or she must immediately contact the IRA custodian to determine the IRA custodian’s internal deadlines for completing the qualified charitable distribution by January 31, 2011. Note that the IRS has concluded that the IRA custodian may mail the check made payable to the qualified charity to the individual, who can then personally forward or deliver the check to the qualified charity.
  • The IRA distribution must be made to a qualified charity described in Internal Revenue Code Section 170(b)(1)(A). This includes most public charities, but does not include donor advised funds, supporting organizations or private foundations. Therefore, an individual must confirm that the charity meets the requirements for a qualified charity prior to requesting the IRA distribution.
  • The IRA distribution may be made from a Traditional IRA or Roth IRA, although it will generally be more beneficial to make a qualified charitable distribution from a Traditional IRA because most distributions from Roth IRAs can already be made on an income tax-free basis regardless of this special tax law.
  • The IRA distribution may be made from an inherited IRA, as long as the beneficiary is at least age 70 ½ at the time of the distribution and all of the other requirements for a qualified charitable distribution are met.
  • One important advantage to this special tax law is that the qualified charitable distribution counts toward satisfying the IRA owner’s minimum distribution requirement for the applicable tax year.
  • The qualified charitable distribution is not included in the individual’s income for the year of the distribution. However, the amount of the qualified charitable distribution is limited to the amount of the distribution that would otherwise be included in the individual’s gross income if the Act did not extend the provision.
  • The individual does not receive a charitable deduction for a qualified charitable distribution for the year of the IRA distribution. However, it only qualifies as a qualified charitable distribution if it would otherwise be fully allowable as a charitable deduction if the Act did not extend the provision. If a portion of the distribution would not qualify for a charitable deduction for any reason, such as if the individual received a benefit in exchange for the charitable contribution or if the individual did not meet the substantiation requirements, then none of the IRA distribution would qualify as a qualified charitable distribution. Therefore, the individual must be sure to obtain the proper documentation from the qualified charity that the gift would qualify for a full charitable income tax deduction if it was not a qualified charitable distribution.
  • A qualified charitable distribution is not subject to withholding.
  • Unfortunately, an individual who took his or her 2010 required minimum distribution from an IRA prior to enactment of the Act cannot rollover the 2010 IRA distribution to an IRA in 2011 in order to instead make a qualified charitable distribution for 2010 by January 31, 2011.
  • If an IRA distribution fails to meet the requirements for a qualified charitable distribution, the entire IRA distribution will generally be treated as a taxable IRA distribution to the IRA owner with a subsequent charitable contribution by the IRA owner to the charity, subject to the normal income tax rules.

In conclusion, there are many issues that an individual must consider in determining whether to make a qualified charitable distribution from one or more of the individual’s IRAs for 2010 and/or 2011. Such issues include the individual’s other retirement assets, estate plan, and charitable intent. If an individual decides to make a qualified charitable deduction, he or she must be sure to strictly comply with all of the requirements. Importantly, the individual must be cognizant of the fact that the 2010 qualified charitable distribution must be completed no later than January 31, 2011, and the 2011 qualified charitable distribution must be completed no later than December 31, 2011.

Please contact your Davis & Kuelthau attorney or a member of our Trusts, Estates & Succession Planning Practice Group if you would like to discuss your specific situation and the possibility of making a qualified charitable distribution for 2010 and/or 2011.