Qualified Charitable Distributions

Direct Gifts From IRAs Can Provide Additional Tax Benefits

December 30, 2014

by Tim Steffen

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The Qualified Charitable Distribution (QCD) rules allow taxpayers to make IRA distributions payable directly to a qualified charity without treating the distribution as taxable income. This law permits up to $100,000 per taxpayer to be contributed directly from an IRA to charity. In addition, the distributions will count towards the IRA owner’s Required Minimum Distribution.

The QCD rules have expired and then extended periodically over the years, and were recently extended again through 2014 with the passage of the Tax Increase Prevention Act of 2014.  These rules do expire again after 2014, meaning taxpayers will enter 2015 with the same uncertainty they had throughout the prior year.

Tax rules

In order to be considered a Qualified Charitable Distribution, the following conditions must be met:

  • The IRA account holder must be age 70½ or older as of the date of the distribution.
  • Eligible recipients are public charities, excluding donor advised funds and supporting organizations.
  • The exclusion from income only applies if the distribution otherwise would have been treated as taxable income (which leads to a planning opportunity – see below).
  • The full payment to the charity would have been allowable for a charitable contribution.
  • The distribution must be a direct transfer from the IRA trustee to the charity.  The IRA owner cannot use the QCD as a way to reimburse themself for gifts already made on their own.

Tax benefits of a qualified charitable distribution

Prior to the QCD rules, a taxpayer could take a distribution from their IRA (which would be included in their Adjusted Gross Income, or AGI), donate the same dollar amount to a charity, and offset the IRA income by claiming an itemized deduction for the donation.  In most cases, the two amounts would offset each other and there would be no net impact on the taxpayer’s taxable income.  For an IRA distribution treated as a QCD, however, the taxpayer neither reports the income as part of their AGI nor claims a charitable deduction.  This treatment may seem to provide the same tax benefit as just donating the cash from the RMD, but it does offer some unique benefits.

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