After Congress passed the new tax legislation January 1, 2013 I was preparing a training session for our staff on January 5. I couldn't find any in-depth summaries of the legislation so quickly after it's passing, so I was forced to read the legislation myself.
The document is very difficult to read and understand. A mish-mash of references to prior tax laws, it only includes the new dates and provisions sprinkled throughout. As I sifted through attempting to make sense of things, one of the provisions made me chuckle. I thought I'd share it.
Background: There is a tax law that allows a taxpayer to take a distribution from an IRA and have it go directly to a charity. Of course, this is not a huge deal because if you took the distribution, then donated the money to charity, you could deduct it on Schedule A and not pay federal tax on it. However, if the standard deduction is better for you than your itemized deductions, you are better off excluding the full amount directly. Also, if the distribution goes directly to the charity, it does not get included in your Adjusted Gross Income. Lower AGI means possibly less of your social security is taxable, you avoid AMT, or avoid other phaseouts based on AGI. Also, for Ohio residents, excluding the donation from AGI means you are not paying Ohio income tax on the distribution.
This provision expired December 31, 2011, meaning all throughout 2012 you could not have your IRA distribution go directly to a charity.
Provision: As I'm reading the new legislation passed January 1, 2013, I see where this provision is extended through 2013. I stop and ponder "why"? Now that 2012 is over, no one can possibly do anything about their 2012 IRA distibutions. It's a nice extension for 2013, but too bad for 2012, right?
Then behold! Congress did not forget that 2012 was over. Several paragraphs are included as "special provisions". This just made me chuckle.
To paraphrase the law, you can take a distribution from your IRA and donate it directly to charity in January 2013 and it will be considered a 2012 distribution. (I imagine the IRA companies love this one; I don't think they can backdate a distribution. And when will you get that 1099R?)
The second part of the special provision allows you to donate to charity in January 2013 the exact amount of the IRA distribution you took December 2012 and exclude it from 2012 income. My only guess for this one is they think taxpayers were waiting to take their IRA required minimum distribution (RMD) until this provision was extended. By December, they couldn't wait any longer and took the RMD. Since the law was extended, taxpayers can now donate to the charity as they might have done if the law were in place in 2012.
The whole thing makes me chuckle. These are a couple examples of some of the most convoluted tax law, all because people can't agree in a timely manner. We wonder why our tax code is so complex.