The Consolidated Appropriations Act of 2016 includes an important provision for charitably-inclined IRA owners. The legislation that passed as 2015 drew to a close makes permanent the Qualified Charitable Distributions (QCDs) from individual retirement accounts. In previous years, helping our clients plan for QCDs was difficult due to the fact Congress would extend this provision for just one year at a time and many times at the end of the year for that year. Now this tool for charitably-minded IRA owners is permanent.
A QCD permits the direct annual transfer of up to $100, 000 from your IRA to a qualified charity. However, you must be at least age 70 ½ to take advantage of this transfer. When you make a QCD, your IRA distributions are not counted as part of your taxable income — and this delivers a number of benefits. For instance, you can potentially avoid the loss of exemptions, deductions, credits and phase outs; the alternative minimum tax; the 3.8% surtax on net investment income; and the increase in Social Security premiums for Medicare Part B and Part D.
Importantly, although QCDs do not count as income, they do satisfy Required Minimum Distributions (RMDs) for the year when the QCD is made. That’s another huge advantage for charitably-minded IRA owners who do not need their RMDs to live on.
There are some important QCD requirements:
- The charity you choose must be an organization that qualifies for a charitable income tax deduction of an individual, other than a private (grant-making) foundation, a donor-advised fund or a supporting organization under Internal Revenue Section 509(a)(3).
- The charity that receives your donation must provide the same contribution acknowledgment needed to claim a charitable income tax deduction.
- You can’t take a QCD from an employer plan.
- QCDs apply to IRAs and Roth IRAs, but there is no tax benefit to using a Roth IRA, because qualified distributions are already tax-free.
- QCDs are capped at $100,000 per person per year. Therefore, a married couple where each spouse has IRAs, can each contribute up to $100,000.
I emphasize that these qualified distributions must be made directly to charity. The law doesn’t provide a way to correct mistakes. That is, you can’t take a withdrawal from your IRA and give the funds to the charity and treat it as a QCD. If you take a distribution, the QCD provision won’t apply and the distribution will be taxable. (However, you may still be eligible for a tax deduction for that contribution.)
Many trustees and custodians have forms and procedures in place to facilitate this transfer. Consult your advisor if you wish to process a QCD from your IRA.