If I had to come up with an opening sentence that would be ensure that no one reads this post, I could do no better than to start with a mention of the Fiscal Cliff negotiations.
But that’s exactly what I’m going to do, because something important came out of the standoff in Washington and the last-minute agreement on January 1. A rather major – if short-term – opportunity emerged for donors and nonprofits alike. And I ask you to please excuse the accounting technicalities as I dive into some tax- and gift-planning talk.
Here’s the situation: Some high-net-worth individuals have what are often called “overfunded IRA accounts” – that is, they have a lot of money in their retirement funds, but because they are very wealthy they don’t need to take an annual distribution in order to support themselves. Despite this, they are required by law to take a minimum annual distribution once they hit age 70½. (The IRS requires the distribution because these folks have never paid income taxes on those funds. This is the opportunity for the federal government to collect money on the income these people are now receiving.)
For a few years, people in this lucky situation were given permission to donate up to $100,000 directly from their IRA accounts to public charities. They didn’t receive a charitable tax deduction for these gifts, but they also didn’t have to declare the funds transferred from their IRAs as income. That is, the gift to charity satisfied the required withdrawal from their IRAs, but the donors didn’t have to pay taxes on it. And for people in that income bracket, that was advantageous.
That provision – called the IRA Charitable Rollover – expired on December 31, 2011. Consequently potential donors with these overfunded IRA accounts couldn’t take advantage of this opportunity for 2012 – until now!
With the Fiscal Cliff deal, Congress agreed to a two-year retroactive extension of this IRA Charitable Rollover provision.
How can donors take advantage of this for a year that’s already over? It’s a good question with a complicated answer. If a person took an income distribution from her IRA during December 2012, she can now – until January 31, 2013 – write a check from her personal checkbook (up to $100,000) to charity, and the IRS will consider that she never received the income in the first place.
At least, that’s my understanding. I’m not a lawyer or an accountant, and if you are a person for whom this may apply, you should consult with your professional advisors to be sure that you do this correctly.
I’ll add that some people are skeptical of how this will all be reconciled. They say that if the donor took the money out of her IRA in December 2012, the IRA custodian will declare it as income to that person. How will the IRS sort it out? Will the difference between the amount of IRA income declared by the donor and the amount sent to the IRS by the donor’s custodian trigger an audit? I don’t know, to be honest. That’s another good reason to urge people to connect with their professional advisors on this.
Despite the clumsiness of this agreement, nonprofits should publicize this opportunity – pronto! Let your donors know. One or two of them may be in a position to make a big gift.
As for tax year 2013: the IRA Charitable Rollover provision will remain in place, under less harried deadlines, and with less convoluted paperwork, through December 31, 2013.
Hope this makes sense, or as much sense as anything having to do with IRS regulations possible could.
Alan M. Cantor is principal at Alan Cantor Consulting, LLC, which works nationwide with community-based nonprofits and people of wealth hoping to maximize their charitable impact. For more information: www.alancantorconsulting.com .