If you are at least 70½ years old and want to support a favorite charity, using your IRA as a source of liquidity can be attractive.
With the American Taxpayer Relief Act of 2012, the tax law provision that makes donations directly from an IRA possible was extended to apply in 2013. Here’s how it works.
Instead of requesting your entire required minimum distribution from your IRA, you ask that some or all of the distribution be sent directly to the qualified charity of your choice. No more than $100,000 can be distributed to charity this way in 2013. You can divide the distribution among several charities. To do this, you will need to get the correct legal name and mailing address of each charity, as well as its Federal EIN, as the custodian of your IRA will likely want this information.
Remember that you do NOT want to have a check made payable to you. Instead, the check should be payable to the charitable organization and mailed directly to the charity from the institution where your IRA is housed. If you want to have your contribution used for a specific purpose, be sure to contact the charity in advance to let them know that the “check is in the mail,” and how you want to see it used. When the charity issues a receipt, ask them to indicate that the money was received from your IRA, if possible.
When you make a contribution this way, that amount will not be counted as gross income for income tax purposes. If you are still employed and receiving enough income that every dollar earned reduces your Social Security benefits, this can be a financial bonus. Remember that any amounts distributed directly to you from your IRA will be included in your gross income for tax purposes. If, instead of making the distribution directly to charity, you receive your required minimum distribution and then contribute the same amount to charity, the charity will receive the same amount and you will end up with the same amount from your IRA in your pocket. However, your entire required minimum distribution will be included in gross income for income tax purposes. If you are charitably inclined and that distribution from your IRA bumps your income up so Social Security benefits are reduced, you’ll be kicking yourself.
In 2013, making your contribution directly from your IRA means that amount is not included in your gross
income. You may or may not have this opportunity in future years. Therefore, this year at least, charitable contributions from IRAs are good for others and good for you.