Congress and the charitable rollover

Q: I would like to donate this year's required minimum distribution from my IRA to charity. However, I understand that Congress has not extended the law that allows me to do this directly, which would allow me to avoid paying income tax on the withdrawal. Do you think they will extend it again? Or should I just forget about it?

A: In review, Congress in 2006, 2009, 2010, and 2011 allowed taxpayers over age 70½ to donate IRA money to an eligible charity without reporting the withdrawal as income on their tax return. This process has since become known as a "charitable rollover." When the law expired in 2010, Congress didn't re-enact it until mid-December of that year.

Even though it was retroactive to the beginning of 2010, many would-be donors lost out because they had already taken their required distribution and they weren't permitted to put it back and re-direct it to charity. This year, the charitable rollover provision has expired again. Hopefully Congress will re-enact it. But it is doubtful that Congress will act on any tax legislation until after the November elections, putting potential donors in limbo once again.

So what should you do? Here is my advice. Under the rules, the first withdrawals you make from an IRA account each year count as your required withdrawal. So if you make a withdrawal before Congress acts to extend the law, you won't be able to redeposit the funds and make a donation from the IRA to charity. If you know you want to make a donation, then go ahead and have your IRA custodian transfer the assets directly to the charity. Some will send it to the charity for you and others will draft a check payable to the charity and send it to you to hand over. Make sure the check is payable to the charity and not to you.

If and when Congress re-enacts the law and makes it retroactive like it did in 2010, your gift will count as a qualified charitable rollover and not be taxed. Remember that charitable rollover benefits cannot exceed $100,000 and are not available for IRA transfers to private foundations, charitable remainder trusts, charitable lead trusts, and donor-advised funds.

If Congress fails to re-enact the law, the worst that can happen is that you will end up with a taxable IRA withdrawal (your required distribution would be taxable anyway) and a deductible charitable gift. If you itemize your deductions on your tax return, the taxable withdrawal and the donation will cancel each other out. Taxpayers in the lower tax brackets might see an increase in their taxable social security and taxpayers in higher tax brackets might see an increase in their Medicare Part B premiums.

Here is an example: Roger, age 75, has an IRA worth $100,000 on Jan. 1. His required minimum distribution is $4,367, which he wants to give to charity. Roger can withdraw $4,367 from his IRA now and instruct his IRA custodian to write those checks payable directly to the charity. If Congress re-enacts the law later this year the $4,357 won't be included in Roger's income. If they don't, Roger will have $4,367 of taxable income and a $4,367 charitable deduction.

Kenneth B. Petersen is an investment adviser and principal of Monterey Private Wealth, Inc., in Monterey. Send questions concerning investing, retirement or estate planning to 2340 Garden Road, Suite 202, Monterey 93940.