Qualified Charitable Distribution tax benefits exist for you if you answer ‘Yes’ to any of the following questions:
- Are you over 70.5 and taking a Required Minimum Distribution from your IRA?
- Are you concerned about the impact of your Required Minimum Distribution on taxes when you reach 70.5?
- Do you make annual contributions to your favorite charities?
A Qualified Charitable Distribution from an IRA is a permanent provision of the Consolidated Appropriations Act of 2016, which was passed by Congress at the turn of the new year.
This action has a wide ranging impact on a number of different areas affecting investors. Let’s take a few moments to review the effects of this action, and how you may benefit from it.
What is a Qualified Charitable Distribution?
First, you may be wondering exactly what a QCD is. A QCD is a transfer of money that individuals may direct from their traditional IRA to an eligible charitable organization. In order for a distribution to qualify, the following criteria must be met:
- The distributee must have attained the age of 70 1/2 years or older.
- The organization to which the donation is made must be an organization that would qualify for a charitable income tax deduction of an individual.
- Any individual retirement or annuity account can have a QCD made from it; however, simplified employee pensions, simple retirement accounts, and inherited accounts are not eligible.
- The organization that receives the distribution must provide the same contribution acknowledgment that is necessary to claim a charitable income tax deduction.
The biggest advantage to the donation is that the IRA Distribution is not included in your gross income at tax time. This can keep you out of a higher tax bracket and avoid higher premiums for Medicare. Finally, less of your Social Security payments may be subject to taxes.
QCDs and RMDs
The most important aspect of a QCD, in the view of many of our clients, is the ability to use it to satisfy the required minimum distribution (RMD) for an IRA. Upon an account holder reaching 70 1/2 years of age, it becomes necessary for an annual distribution to be taken from the account.
The size of this distribution is dependent on the age of the account holder, and on the value of the account itself. Clients who are using the proceeds of their IRAs to live off of usually meet the RMD fairly easily.
There are, however, other clients who have alternate sources of income that may not be in need of the money from the RMD. In this instance, the RMD can actually represent a liability to them.
Taking the necessary distribution will cause their taxable income to rise, and thus increase the taxes they will need to pay in the given tax year.
The solution to this problem is presented by QCDs. A QCD involves a transfer directly from the account to the charitable organization, without the account holder taking any custody of the funds, and, therefore, avoid having them applied to gross income.
Thus, clients who are inclined towards charitable giving and who are not financially dependent on the funds in their IRAs can make a contribution, and take care of a requirement of the account in an advantageous manner.
Rules and Limitations
There is a total cap of $100,000 for qualified charitable distributions for any individual IRA account in a given year.
This means that any funds that represent a QCD, up to this $100,000 limit, can be excluded from the distributee’s gross income, and thus prevent an increase in the tax liability the distributee will have for that year. This course of action offers a decided advantage over a distributee taking a taxable distribution, and then contributing that distribution’s proceeds to charity.
While the $100,000 limit is in place to prospective donors, the amount that is transferred does not have to be performed in a single transaction, nor does it need to go to a single qualifying organization. Additionally, the $100,000 limit applies only to the amount that can be excluded from gross income.
If a distributee wishes to give more than this, he or she is perfectly free to do so. However, in this instance, the overage will not be excluded from the calculation of gross income for that tax year.
Qualified charitable distributions can be made both using cash, and by transferring a security. The value of the security need only to have a pre-tax value that is able to cover the size of the contribution in question.
Eligibility Time-frame
The legislation passed last month which made permanent QCDs also retroactively applied the criteria for them to contributions made on or after January 1, 2015 (in other words, for the 2015 tax year). If you have made any distributions between January 1 and December 31, 2015 that would qualify as QCDs, you will need to remember this when filing your taxes.
Please keep in mind we are not tax professionals. It is always wise to consult a tax professional to confirm the rules and regulations in regard to your specific tax situation.
For more information on QCDs and how they may affect you, consult these sources:
IRA Qualified Charitable Contributions Reinstated, Made Permanent
Analysis of IRA Charitable Rollover Extension
