A valuable late-year IRA extension

The Tax Relief Act of 2010 includes an extension of the qualified-charitable-distribution provision retroactive from Jan. 1, 2010, through Dec. 31, 2011.

Because it was passed so late in the year and taxpayers wouldn’t have much time to plan for these distributions, Congress decided that individuals can take the distribution this month and it will be treated as a 2010 distribution. Taking the distribution in January can also satisfy the required minimum distribution for 2010.

As a reminder, only taxpayers or beneficiaries who are at least 701/2 at the time of the transfer can make a direct transfer from their individual retirement account to a qualified charity. Any distributions, including required minimum distributions payable to the account owner, can’t qualify as a qualified charitable distribution.

The amount transferred to charities won’t have to be included in income and can be used to satisfy the account owner’s required minimum distribution for the year. The IRA owner can transfer up to $100,000 per year to a charity, regardless of what the annual RMD amount is.

Also, there is no tax deduction for the donation. The tax savings is that the distribution isn’t included in adjusted gross income.

Here is what to tell your clients:

If they haven’t yet taken their required minimum distribution for 2010 and want to donate that amount to a charity, they have until the end of January to transfer that distribution to the charity. For those who have already taken their 2010 required minimum distribution, that can’t be returned to the IRA and then distributed to charity.

However, amounts over the required minimum distribution that were received within the past 60 days are eligible for rollover as long as the taxpayer hasn’t done another rollover from the issuing IRA within the past 12 months. Once the funds are re-contributed, the taxpayer can make a direct transfer to a charity with those funds.

The Internal Revenue Service has ruled that required minimum distributions from an IRA received by a taxpayer can’t be rolled over into an IRA.

As noted on Page 24 of the 2009 IRS Publication 590, Individual Retirement Arrangements: “Amounts that must be distributed during a particular year under the required-distribution rules are not eligible for rollover treatment.” Moreover, there is no provision in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, nor any hint in the committee report for such RMD re-contribution.

If clients didn’t want to donate the IRA distribution to charity, the 2010 required minimum distribution must be taken by year-end as usual. If it wasn’t taken in a timely manner, the 50% penalty on the amount not taken will apply.

In a special edition of Retirement News for Employers issued Jan. 12, the IRS gives us some indication of the tax reporting for 2010 qualified charitable distributions done this month.

There will be no special reporting required of IRA custodians. Distributions made last year will go on a 2010 1099-R, and all distributions made this year will be reported on a 2011 1099-R.

The election to treat a QCD done this month as a 2010 distribution is made by the taxpayer. He or she will include the amount of the 2011 QCD on his or her 2010 tax return.

On the 2010 Form 1040, the distribution is included on line 15a but isn’t included on line 15b. The notation “QCD” goes next to line 15b.

One final note: Taxpayers who do a 2010 QCD this month still will have to take their 2011 RMDs in full. When taxpayers calculate their 2011 RMDs, the amount of a 2010 QCD that was distributed in 2011 is subtracted from the account balance Dec. 31, 2010.

Example: Jean had a required minimum distribution of $50,000 for 2010. She took distributions of $5,000 a month on the first of every month for a total of $60,000.

Jean would like to do a QCD for 2010. It is now the middle of January.

Jean can return $5,000 to her IRA (her Dec. 1 distribution), as it was made less than 60 days ago and is in excess of her RMD amount. By Jan. 31, Jean can transfer any amount up to $100,000 to a qualifying charity, and it will count as a 2010 QCD.

It won’t satisfy Jean’s 2010 RMD, as she had already received her RMD. Jean will be able to subtract the amount transferred from her 2010 year-end account balance before calculating her RMD for 2011.

Jean can then do another transfer for up to $100,000 this year and use that transfer to satisfy her RMD for 2011.

Ed Slott, a certified public accountant, created The IRA Leadership Program and Ed Slott’s Elite IRA Advisor Group. He can be reached at irahelp.com.