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TIME WARP: Certain IRA Distributions to Charities Made During January 2011 Can Relate Back to 2010

January 11, 2011
Tax Advisory

The vast majority of IRA distributions are fully taxable to the account owner when made, and are treated as ordinary income. For individuals over age 70 1/2, the law prior to the end of 2009 allowed IRA distributions that were made directly to charity to be excluded from the donor's gross income, which because of the computational method of the charitable income tax deduction resulted in significant savings for qualifying individuals with charitable intent. In addition, those direct IRA distributions were treated as "required minimum distributions". Thus, the rules allowed significant income tax benefits in addition to supporting the good works of the recipient organization.

Although this provision was not in the law during 2010, it was reincarnated by the recent compromise tax bill that was passed at the end of 2010. Because of its 11th hour enactment, the law provides that qualifying distributions made prior to the end of January 2011 can be treated as if made during 2010. This retroactive opportunity is especially advantageous for individuals who neglected to take their required minimum IRA distribution during 2010, which would normally result in a 50% excise tax on the amount of the shortfall. By directing the required minimum distribution to charity during January 2011, the 2010 required minimum requirement can be retroactively met without any adverse income or excise tax consequences.

If this remedy is of interest, please contact IMMEDIATELY any member of the Varnum Estate Planning, Tax, or Employee Benefits teams for more information about this planning opportunity.

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