Charitable donations from your IRA could save taxes

Congress has temporarily revived a law that lets you make charitable donations directly from your IRA, which might provide some significant tax advantages.

But the “IRA charitable rollover” will be allowed only until the end of 2013, so if you think this might benefit you, you should take advantage of it this year.

If you’re over the age of 70½, you’re required to take minimum distributions each year from your IRA, and you have to pay income tax on those distributions. But the “rollover” law lets you transfer assets from your IRA to a charity, and whatever amount you transfer reduces the amount you’re required to withdraw. So if you’re required to withdraw $20,000 in 2013, but you instead donate $20,000 to charity, you don’t have to withdraw any funds for yourself, and you don’t have to pay any income tax.

Note that you will not get a charitable deduction on your taxes for the amount you donate in this way. However, you might still come out ahead, because you won’t be subject to the “phase-out” of charitable deductions for higher-income taxpayers or the alternative minimum tax.

Also, donating to charity directly from an IRA results in a lower adjusted gross income than taking an IRA distribution and then donating the money to charity. A lower adjusted gross income can have a number of advantages, such as reduced Medicare premiums and possible avoidance of the 3.8% surtax on investment income.

To qualify, you must contact the plan custodian and have the custodian transfer the assets directly to the charity. If the custodian sends you the funds and then you give them to the charity, you’ll have to pay income tax on the distribution.

For 2013, you can give up to $100,000 to charity from an IRA. You can donate to any traditional charity, except for a donor-advised fund.

(Roth IRAs are different because they aren’t subject to the minimum distribution rules. So this technique is best used with a standard IRA.)