The American Taxpayer Relief Act of 2012, signed into law on January 2 by President Obama, contains two significant provisions that may impact charitable planning.
First, the act extends through December 31 the provision that allows taxpayers to make tax-free distributions from individual retirement accounts to charitable organizations, up to $100,000 each year. To qualify for this treatment, the taxpayer must be age 70 1/2 or older. In addition, only public charities are permitted recipients of the IRA distributions—not private foundations, supporting organizations or donor-advised funds.
For an IRA distribution to charity to be effective for 2012, a taxpayer may direct a distribution of up to $100,000 from his or her IRA to charity before February 1 and retroactively treat the distribution as occurring in 2012. Alternatively, if a taxpayer received a required distribution from his or her IRA in December 2012, the taxpayer may make distributions to one or more public charities before February 1 and exclude from income the amount of those contributions up to $100,000. These provisions in particular require input from the IRS.
In addition, the new law reinstates the so-called “Pease limitations,” which could impact and limit the economic benefit of charitable deductions realized by taxpayers. Specifically, the new law reduces the taxpayer’s otherwise allowable itemized deductions (including the deduction for charitable contributions) by 3% the amount by which the taxpayer’s adjusted gross income exceeds:
• $300,000 for married couples and surviving spouses;
• $275,000 for heads of household;
• $250,000 for unmarried individuals; and
• $150,000 for married couples filing separately.
These amounts are adjusted for inflation after 2013.
If a taxpayer is obliged to make charitable contributions (for example, due to an outstanding pledge) and will be impacted by the Pease limitations, the IRA provision allowing for exclusion from IRA distributions to charity may be particularly relevant for purposes of satisfying pledge payments. Indeed, in such situations, it may be more tax efficient for a taxpayer to prepay pledge payments using distributions from his or her IRA in 2012 and 2013 to avoid the impact of Pease limitations on the taxpayer’s charitable deductions.
Neil T. Kawashima is a partner in the law firm of McDermott Will & Emery LLP in Chicago.