Our thoughts and prayers are with the people of Japan as they struggle in the aftermath of the massive March 11 earthquake and tsunami that devastated the northeast part of the country. At this time, more than 18,000 people are dead and many are still missing. The ongoing nuclear crisis at the Fukushima Dai-ichi plant is causing the evacuation of an increasingly large area surrounding the plant. And as officials work heroically to cool the plant with seawater, the discovery of radiation-tainted vegetables and tap water has increased the public’s fear.
According to the World Bank, rebuilding may cost the world’s third-largest economy upwards of $235 billion. For those who wish to donate to Japan’s recovery efforts, domestic charitable organizations like the American Red Cross are often the most effective, tax-efficient choices for funding overseas relief efforts. (Direct contributions to foreign organizations are generally not deductible.) The American Red Cross now lists “Japan Earthquake and Pacific Tsunami” as one of the choices for online donations at the Red Cross website. Alternatively, you can make a $10 donation by texting “REDCROSS” to 90999. Among countless other organizations, UNICEF is also coordinating efforts to help the children of Japan. You can the UNICEF website to donate 100 percent of your desired amount to their fund designated for victims of the earthquake. Or, you can simply text “JAPAN” to 864233 to donate $10. After the earthquake in Haiti, Congress passed a law allowing those who contributed to relief efforts through March 1, 2010, the option of taking a deduction on either their 2009 or 2010 tax returns. Thus far, we have not seen a similar provision for donors to Japan.
As Americans continue to respond with characteristic generosity to the disaster in Japan, it’s also a good time to discuss an exceptional, if short-lived, opportunity in the planned giving arena. In nearly every client discussion of charitable planning, I underscore the usefulness of Qualified Charitable Distributions (QCDs) that permit individual retirement account (IRA) owners who are age 70½ and older to make tax-free distributions of otherwise taxable dollars from their IRAs to qualified charitable organizations.
Although this provision was set to expire, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed into law by President Obama on December 17, 2010, extended QCDs through 2011. These QCDs are limited to $100,000 per year, per IRA owner or beneficiary for 2010 and 2011. Any distribution you direct to a charity also satisfies your required minimum distribution (RMD), up to $100,000, for the year.
There are a few important rules that govern the tax-free treatment for QCDs. First, your QCD must be made to a qualified charity. Most contributions to public charities are considered qualified, but contributions to charitable gift annuities and donor-advised funds do not qualify. Also, your QCD check has to be payable directly to the eligible charity. Any IRA distribution that you receive first and subsequently direct to the charity will not qualify for tax-free status. Additionally, the charity cannot provide you with any goods or services as thanks for your contribution. Under normal circumstances, if you receive tickets to a ballgame as thanks for a cash contribution, you would simply reduce your charitable deduction by the tickets’ face value. However, if you accept a gift from the charity in return for your QCD, your entire contribution will not qualify as tax-free. When QCDs were first enacted by the Pension Protection Act of 2006, tax-free distributions were allowed from SEP IRAs and SIMPLE IRAs provided no employer contributions were made for the same tax year. Note, however, that distributions from SEP IRAs and SIMPLE IRAs no longer qualify for tax-free treatment. Currently, traditional and Roth IRAs are the only retirement savings accounts that qualify for QCDs.
Your QCDs to a charity for the 2010 or 2011 tax years will be recorded as a regular IRA distribution on your Form 1099-R. However, there is a place on Form 1040 where you simplyexclude your direct contributions from your traditional or Roth IRA of up to $100,000 to qualified charities from your taxable IRA distributions.
Of course, I will be happy to review how these general QCD rules relate to your specific situation and philanthropic goals. Remember, doing good makes you feel good – and there’s now plenty of scientific evidence to back up that claim. As head of the Institute for Research on Unlimited Love (IRUL) at Case Western Reserve University in Cleveland, Ohio, Dr. Stephen Post researches how charitable giving affects people’s lives. Dr. Post’s book, Why Good Things Happen to Good People, summarizes new scientific data on altruism that demonstrates that when people commit to helping others, they enjoy healthier, happier lives.