How to Use The Tax Break of a Qualified Charitable Distribution
IRA owners who have reached the age of 70 ½ may distribute up to an annual limit of $100,000 directly from their IRA to an eligible charity and have the benefit of excluding such distribution from income. Even though they do not get a charitable deduction, the benefit is a reduced adjusted gross income amount, thereby reducing loses of itemized deductions, credits, and exemptions. There are technical hurdles to get over in order to qualify; the following topical items will address these.
1) The distribution must be a direct transfer from the financial institution holding the IRA to the eligible charity. The check cannot be made out to the IRA owner; otherwise, the qualified charitable distribution(QCD) does not qualify and the IRA owner has reportable income. The check can be mailed to the IRA owner who in turn mails or hand-delivers the check to the charity. The distribution must be made by December 31 which means the check must be in the mail by 12/31.
2) The charity must know the IRA owner’s name and address because the IRA owner must still comply with the rules for substantiating the charitable contribution (there must be a written acknowledgement from the charity for gifts over $250).
3) The Required Minimum Distribution (RMD) for the year does not have to be taken. The QCD satisfies that requirement. However, if the RMD has been taken, the IRA owner is stuck with it. If the RMD has not been taken and such RMD amount is equal to or close to the IRA owner’s desired charitable donation to one or more charities, the IRA owner might consider a QCD instead of the RMD.
4) The $100,000 limit applies to each IRA owner individually. Married couples who have their own individual IRAs each can contribute up to $100,000 in one calendar year.
5) The tax law allows the QCDs for 2008 and 2009 only, as provided by the Economic Emergency Stablization Act of 2008 extension of the provisions of the Pension Protection Act of 2006 which allowed QCDs for 2006 and 2007.
6) The contribution would have had to be entirely deductible if it were not made as a QCD. In other words, the actual limit is 50% of adjusted gross income, the same limit that applies to contributions to 501(c)(3) organizations.
7) QCDs can only be made from IRA type accounts (traditional IRAs, ROTH IRAs, SEPs, nondeductible IRAs). They cannot be made from qualified retirement plans, such as 401(k) plans.
8) QCDs can only be made to qualified charities, which generally are 501(c)(3) organizations. Donor-advised funds, certain private foundations, charitable remainder trusts, charitable lead trusts, and similar nonqualified organizations will not satisfy the requirements of being an “eligible” charity.
9) Even though a QCD can be made from a ROTH IRA, the QCD only applies to the amount of the distribution that would have been taxable, which probably is very little. Effectively, ROTH IRAs are not a good source for a QCD.
10) A QCD can satisfy a pledge previously made and the QCD will not be considered a prohibited transaction.
11) If more than the $100,000 annual limit is donated to an eligible charity, the excess must be reported as income and a charitable deduction taken, if otherwise eligible given the 50% limitation and 501(c)(3) requirements.
12) Split interest gifts do not qualify.
13) As indicated above, the eligible QCD is not reportable income, and no charitable deduction is allowed.
Any questions, comments or concerns may be addressed in an email to info@johnecpa.com or by calling John A. Epeneter at 978-897-0741.
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