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Bad News for Would-Be 2010 IRA Donors

It’s official: Many taxpayers who were hoping to make charitable IRA donations for 2010 will not be able to do so.

The Internal Revenue Service has issued a statement saying that the law doesn’t allow taxpayers to return payouts taken last year in order to make direct charitable Individual Retirement Account donations for 2010.

The questions arose after lawmakers tucked a provision into the giant December tax package that retroactively extended the IRA charitable donation. This highly popular rule, which had expired at the beginning of 2010, allows taxpayers who are 70 l/2 or older to donate up to $100,000 per year of IRA assets directly to a charity. There’s no deduction for the gift, but it doesn’t count as income and it can satisfy the Required Minimum Distribution, or RMD, as I reported last month.

Lawmakers, recognizing that their own delays had caused problems, gave taxpayers until Jan. 31 of this year to make 2010 donations.

But the law did not address the predicament of those who wanted to make IRA donations last year but took required payouts instead, often at the last minute, because they were afraid Congress wouldn’t extend the law.

Taxpayers like Earl Kirk of Houston are still angry, however. Mr. Kirk says he “waited all year” to see if Congress would extend the provision. “I gave up on Dec. 12, five days before they acted, and made my contribution from taxable sources,” he wrote in an email. “The practice of extending tax rules two years at a time makes long-range planning impossible, and adds measurably to my fury with Congress.”

On Jan. 5, the IRS released a statement through a spokesman citing the law, which prohibits required payouts from being rolled back into an IRA for any reason. It added, “There’s 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 recontribution.”  (See the full statement below.)

Translation: The IRS has no authority to allow taxpayers to roll their payouts back into their IRA and then make the allowed donation.

Experts expected this answer. “This won’t help the many who already took their 2010 RMDs,” says Blanche Lark Christerson, a managing director at Deutsche Bank Private Wealth Management. “But it does allow those who really want to help charities to double up in 2011, provided one of the gifts is made in January and they make the appropriate election.”

Readers, were you hoping to return payouts to make a charitable contribution? Or did you make a contribution from taxable income sources, like Mr. Kirk, just before the tax deal passed?

From IRS spokesman Eric Smith, Jan. 5, 2011.

“Required minimum distributions (RMD) from an IRA received by a taxpayer cannot be rolled over to 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’s 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 recontribution.”

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    • Actually it’s more complicated than faknig income. First of all, your Ebay activities are not considered by IRS as a business, which means those fake $5000 don’t qualify for Roth IRA and you still have to pay capital gain tax unless you can prove it is a business. To prove it is a business, you would have to have cost basis in the stuff that you sold and prove that you have been doing it for profit for at least three out of five years. If you don’t pass the profits test, then you’ll have to prove that you carry on the activity in a businesslike manner. This includes, for example, keeping good books and records, promoting your business and holding down costs where possible. Now let’s pretend you prove it is a business, then you’ll have to pay SE tax of about 15% so $5000 would yield about $750 in SE tax. This also means that you can’t contribute the full $5000 to the Roth IRA because you don’t have $5000 of income after taxes. In other words, you have to fake $6000. Here’s the best part, when the IRS audits your tax return and find out about your fake income (trust me, they will find out if you get audit), you’ll get slap with penalties and additional taxes on your IRA contributions. Your $5000 in the IRA is going to get wiped out after figuring the penalties and taxes. This is not even the worst case. Your actions are considered intentional fraud and IRS will most likely press charges. You are not giving Uncle Sam free money, Uncle Sam has the right to the money. And because the earnings in Roth IRA are tax-free, you are avoiding paying taxes. Dude, you really think you can outsmart the IRS??Why don’t you just open a regular broker account and pay taxes when you have gains. Seriously, you don’t want to mess with the IRS. It’s going to be a painful experience. If you in fact turn $3000 into $100,000, then you wouldn’t mind paying taxes like everybody else. I don’t mean to be like your parent but I just don’t want you to get in trouble especially with the IRS.

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    • 4kP6PE Ppl like you get all the brains. I just get to say thanks for he answer.

    • Yes I’m one of those who took their RMD late in the year and then when congress said charitiiblle contributions from your IRA in January 2011 would not be taxable took additional money oot in January 2011 and give it to charity. It is my understanding that this additional money is not taxable but the original withrawal is and the ballance used to firgure the RMD for next year is based in the balance after the January distributionn.. What a stupid mess.

About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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