Make 2012 Income Disappear!
If this was science fiction, people would not believe it. It would simply be too far-fetched and convoluted.
By now, everyone should have heard about the new Tax Act (the American Taxpayer Relief act of 2012 – ATRA) signed by the president on January 2, 2013. While ATRA has numerous implications for too many taxpayers, what we are going to focus on today must be addressed during the month of January (more on ATRA in the near future).
Qualified charitable distributions (QCDs) permit individuals required to take minimum distributions from their IRAs to direct those withdrawals to their favorite charity and not recognize the income. QCDs are a tremendous benefit because the income does not show up on the front of the tax return (often referred to as ‘above the line’).
This option existed previously for several years although it was allowed to lapse after 2011. Many tax experts thought it might be reinstated for 2012 retroactively, which is what happened the last time Congress reinstated this provision for 2010. We even advised a number of clients to have distributions sent directly to their charity in hopes this provision would be reinstated retroactively. We called this planning with a provision that did not exist.
Guess what? Congress did it again, authorizing this provision retroactively after the year ended. Congress went even further on two fronts.
First, if a distribution was taken from an IRA in December 2012, Congress is allowing the opportunity to make that income disappear.
Transfer a cash amount equivalent to the December minimum distribution withdrawal to a chosen charity by January 31, 2013 and counting the amount as income in 2012 is not required.
Second, if your required minimum distribution in 2012 was not taken in 2012 (because you firmly believed QCDs were going to be reinstated retroactively, and you had absolute faith in Congress, and you were lucky beyond all odds), you can transfer that 2012 required minimum distribution directly to a charity and satisfy your 2012 required minimum distribution.
These two actions described above must be taken by January 31, 2013.
You have all of 2013 to make a QCD for 2013 by transferring your 2013 required minimum distribution to a charity.