For those of you who are charitably inclined and over the age of 70 ½, we have great news that could impact your charitable gifting strategy! In December 2015, Congress made permanent the ability for taxpayers to divert their required minimum distribution directly to a qualified charity.
The ability to make this charitable election, technically called a Qualified Charitable Distribution (QCD), has actually been available since 2006. Unfortunately, very few taxpayers took advantage of it due to the fact that the law had technically “expired” in the previous tax year and Congress had to act “retroactively” to extend this provision (which they normally did in late December).
With Congress recently agreeing to make this provision permanent, we thought it would be a good idea to explain the potential benefits of making charitable contributions directly from your IRA versus other sources. Here are a few of the major benefits:
- Those who are normally not able to itemize their deductions (and not deduct charitable gifts), would avoid paying taxes all-together on the IRA distribution that is gifted to charity.
- Total income would be reduced. As a result, the taxability of Social Security income may decline.
- With the reduction of income, passive losses (from an investment property, etc.) may become more deductible.
- For high income taxpayers, reducing income with qualified charitable contributions, could serve the purpose of reducing Medicare premiums.
Although taking advantage of direct gifts from your IRA may sound like a great idea, there are a few logistics that you should be aware of, including the following:
- Taxpayers must be over the age of 70 ½ at the time of the Qualified Charitable Distribution.
- All, or part of the taxpayer’s required minimum distribution may be included in the Charitable Distribution.
- Qualified Charitable Distributions are limited to $100,000 per taxpayer per year.
- The distribution must be paid directly to the charity from the IRA trustee. A gift to a donor advised fund would not qualify.
- Because the distribution is paid directly to charity, there are no taxes withheld from the Qualified Charitable Distribution.
- The Qualified Charitable Distribution is not included in income.
- When making a Qualified Charitable Distribution, you are not allowed to also take a deduction for the charitable gift.
While we believe this gifting strategy can be a great idea for some people, it is definitely not appropriate for everyone. Also, many custodians require extra time to process this type of IRA distribution, so start the process earlier than you would for a normal IRA distribution.
If you would like to learn more about this gifting strategy, check out IRS Publication 590-B, or contact us to discuss the specifics of your circumstances.