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Tax-Free Transfers From IRAs to Charity Still Allowed

Congress extended the law giving seniors the ability to transfer money from their IRAs to charitable organizations without paying taxes on the distribution, but there are some special rules.

Did Congress end up extending the law permitting tax-free transfers from IRAs to charity for 2012?

Yes! After the last possible minute, Congress extended the law that allows people over age 70½ to make tax-free transfers of up to $100,000 to charity for 2012 and 2013. But the rules are complicated because Congress didn’t pass the law until January 1, 2013, a day after the deadline for people over age 70½ to make required minimum distributions from their IRAs.

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People who transferred money from their IRAs to charity in 2012 hoping that the law would be passed retroactively are in luck: Up to $100,000 of that money can count as a tax-free transfer (as it has in the past) and also counts as their required minimum distribution for the year.

Because the law was passed in the new year, there are also some special rules for taking advantage of the break for 2012. People who waited until December to see whether the law would be passed, then worried that they’d miss the year-end deadline for taking their required minimum distribution and ended up withdrawing cash from their IRA, now have until January 31, 2013, to give that cash to a charity and have it count as a tax-free transfer for 2012 (up to the $100,000 limit). This is the one case where the transfer doesn’t need to be made directly from the IRA to the charity. But those two dates are key: The rule applies only to people who withdrew cash in December 2012 -- not earlier -- and the money must be given to a charity by January 31, 2013.

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And anyone who is over age 70½ and hasn’t already made a tax-free transfer from an IRA to charity can still do so, until January 31, 2013, and have it count for 2012. If you missed the December 31 deadline to take your required minimum distribution because you were waiting for Congress to act, you can avoid the 50% penalty for failing to take your RMD as long as you make a direct transfer to charity by January 31, 2013. You can transfer up to $100,000 for 2012 before the end of January and transfer another $100,000 for 2013 without increasing your adjusted gross income.

Because there are specific time limits for taking advantage of these rules, “make sure you keep meticulous records,” says Christine Fahlund, senior financial planner with T. Rowe Price. It’s particularly important to keep documentation of the date and amount of your IRA withdrawal in December 2012 and the date, amount and charity you gave the money to in January 2013, she says. Fahlund also recommends making the contribution to the charity well before January 31, 2013, so you won’t have to worry about whether the transaction will be completed by the deadline. And the good news is that since Congress extended the law for both 2012 and 2013, you won’t have to worry about making these last-minute decisions again next year.

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