IRS: No Charitable IRA Do-Over

Taxpayers Can't Roll Back Payouts, to Their Frustration.

It is official: Many taxpayers who were hoping to make charitable IRA donations for 2010 won't be able to do so.

The Internal Revenue Service 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 70½ or older to donate up to $100,000 a year of IRA assets directly to a charity. There isn't a deduction for the gift, but it doesn't count as income and it can satisfy the Required Minimum Distribution, or RMD. (See Tax Report, Dec. 18, 2010.)

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

But the law didn't 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."

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."