How to Donate IRA Distributions to Charities
The new tax law revives the tax break for people who transfer required minimum IRA distributions directly to charitable organizations.
Does the new tax law extend the old rule that allows people to donate their IRA distributions to charity for 2010? Time is running out!
Yes. The tax law signed on December 17, 2010, allows taxpayers age 70½ or older to donate up to $100,000 from their IRAs directly to a charity for both 2010 and 2011 -- just as they’d been able to do for the past few years. The amount of the charitable contribution is excluded from your taxable income, but you can’t double dip and claim a tax deduction for the donation, too.
Transferring the money directly from the IRA to the charity is a way to get a tax break for your donation if you don’t itemize deductions on your tax return. (Many retirees -- often those who no longer have a mortgage -- don’t itemize and can’t deduct charitable contributions.) The extension comes just in the nick of time before IRA holders have to make a final decision about their required minimum distributions for 2010. (See Mandatory IRA Distributions Are Back for more information about required minimum distributions.)
Because the extension was passed so late in the year, Congress is giving IRA holders some extra time to make the transfer for 2010. You have until January 31, 2011, rather than December 31, 2010, to transfer the money from the IRA directly to a charity and still count it as your 2010 required minimum distribution. But the extension through January applies only to charitable donations. Noncharitable required minimum distributions still need to be made by December 31, 2010, says Petra Campos, of Charles Schwab.
You don’t need to file any special forms now to alert the IRS about transferring IRA funds to a charity. “As long as the taxpayer has the statement that the transfer was completed by January 31, 2011, he or she should be okay,” says John Roth, senior tax analyst with CCH, a tax-information publishing company.
To qualify for the tax break, the money must be transferred directly from the IRA to the charity. (Don’t make the mistake of taking a distribution from your IRA and then writing a check to the charity. If you do, you’ll owe taxes on the entire distribution, and you would be able to take a deduction for the charitable donation only if you itemize your tax deductions.) .
Contact the charity to get its tax identification number and address. Because the transfer must be made directly, the IRA administrator must make out the check to the charity, says Steven Woolf, senior tax policy counsel for the Jewish Federations. Many charities can provide donors with a draft letter to send to the IRA administrator.
Then, contact your IRA administrator for directions on making the transfer. T. Rowe Price, for example, requires a signature guarantee in writing to make the transfer, on either a form or a letter of instruction. You cannot authorize the transfer on the Internet or over the phone. At Vanguard, an IRA distribution to anyone other than the account holder, such as a charity, typically requires a written IRA distribution form specifying a "special payee." Most people prefer to have the check mailed to their own address, even though it is payable to the charity, so that they can deliver it to the charity themselves, says John Heywood, of Vanguard.
For more information about the new tax law, see Tax Deal: What’s In It for You?