Advice4Life | Charitable Contributions from IRAs

May 18th, 2019 | | Advice4Life

Charitable Contributions from IRAs

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Background

The Pension Protection Act of 2006 first allowed taxpayers age 70½ or older to make tax-free charitable donations directly from their IRAs. Technically, these taxpayers were allowed to exclude from gross income otherwise taxable distributions from their IRA (“qualified charitable distributions,” or QCDs), up to $100,000, that were paid directly to a qualified charity. The law was originally scheduled to expire in 2007, but was extended periodically through 2014 by subsequent legislation, and finally made permanent by the Protect Americans from Tax Hikes (PATH) Act of 2015.

How QCDs work

You must be 70½ or older in order to make QCDs. You direct your IRA trustee to make a distribution directly from your IRA (other than SEP and SIMPLE IRAs) to a qualified charity. You can exclude up to $100,000 of QCDs from your gross income each year, thereby avoiding taxation on those amounts. If you file a joint return, your spouse can exclude an additional $100,000 of QCDs.

QCDs count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to receive from your IRA, just as if you had received an actual distribution from the plan. However, distributions that you actually receive from your IRA (including RMDs) that you subsequently transfer to a charity cannot qualify as QCDs.

Example:

Assume that your RMD for 2019, which you’re required to take no later than December 31, 2019, is $25,000. You receive a $5,000 cash distribution from your IRA in February 2019 and then send the charity a check for the $5,000. In June 2019, you make a $10,000 QCD to Charity A. You must include the $5,000 cash distribution in your 2019 gross income. You exclude the $15,000 of QCDs from your 2019 gross income. Your $5,000 cash distribution plus your $15,000 QCD satisfy $20,000 of your $25,000 RMD for 2019. You’ll need to withdraw another $5,000 no later than December 31, 2019, to avoid a penalty.

Caution:

The gift cannot be made to a private foundation, donor-advised fund, or supporting organization (as described in IRC Section 509(a)(3)). The gift cannot be made in exchange for a charitable gift annuity or to a charitable remainder trust.

Why are QCDs important?

The 2018 Tax Reform Act limits one’s ability to itemize due to the restriction of the State and Local Income Tax (SALT) deduction to $10,000.

In the past you could take a distribution from your IRA, and then make the contribution to the charity. You would report the IRA distribution as taxable income and receive a corresponding income tax deduction for the charitable contribution, if you had enough deductions to itemize.

QCDs avoid all this, by providing an exclusion from income for the amount paid directly from your IRA to the charity — you don’t report the IRA distribution in your gross income, and you don’t take a deduction for the QCD. The exclusion from gross income for QCDs provides a tax-effective way for taxpayers who don’t itemize deductions to make charitable contributions.

The above example is provided for illustrative purposes only. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
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