Charitable Contributions from Your IRA
With the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Act), Congress retroactively reinstated the ability of taxpayers to make direct qualified charitable distributions (QCDs) from an IRA, in amounts up to $100,000, by IRA owners who are at least age 70½ years of age. You have until January 31, 2011 to make a QCD for 2010.
In general, distributions from IRAs must be included in gross income in the year in which distribution occurs, and income taxes must be paid on the taxable portion. The advantage here is that a QCD is not included in income.
QCDs must come from traditional or Roth IRAs. They cannot be made from Simplified Employee Pensions (SEP-IRAs), Savings Incentive Match Plans for Employees (SIMPLE-IRAS) or from defined contribution retirement plans (401 (k) or 403 (b) plans).
The maximum QCD is $100,000 per person. You and your spouse can each make a $100,000 QCD for a total of $200,000 if you file a joint tax return.
A QDC is any distribution from an IRA directly made by the IRA trustee or custodian to a qualifying charity. In general, it must be a public charity not a private foundation. It is absolutely essential that the check go from the plan to the charity. The funds cannot pass through the taxpayer’s account. The distribution is eligible for exclusion only if it is made after the IRA owner attains age 70½ and only to the extent the distribution would be includible in gross income. If the IRA owner made nondeductible contributions to the IRA, a special rule determines what portion of the distribution is treated as income. Thus a QCD is deemed to come first from taxable funds, then from any nondeductible IRA contributions. Previously, distributions would have been allocated proportionately between deductible and nondeductible contributions.
Distributions to charities from IRAs that are excluded from gross income are not included in the 50% of Adjusted Gross Income (AGI) limitation on charitable deductions, nor are the QCDs considered as charitable contributions for purposes of passing the 50% test.
Originally enacted in 2006, the Internal Revenue Code provision allowing QCDs expired at the end of 2009. But now it is once again available, retroactive to January 1, 2010, and continuing through December 31, 2011. Since the 2010 Tax Act was passed so late in the year, there is a special provision for 2010 only, which allows the IRA owner to make such a QCD for the 2010 tax year as late as January 31, 2011. Taxpayers will be able to elect (in such form and manner as the Secretary of the Department of the Treasury may prescribe) to have QCDs made in January 2011 treated as having been made on December 31, 2010. A QCD made in January 2011 is permitted to be (1) treated as made in the taxpayer’s 2010 taxable year and, thus, permitted to count against the 2010 $100,000 limitation on the exclusion, and (2) treated as made in the 2010 calendar year and, therefore, permitted to be used to satisfy the taxpayer’s minimum distribution requirement for 2010.
The QCD allows taxpayers aged 70½ or older to exclude from their gross income IRA
distributions that are transferred directly to a charity. Absent the QCD, some taxpayers could
achieve the same result by including the IRA distribution in gross income, donating the
distribution to a charity and taking an itemized charitable deduction for the donation. However, taxpayers who do not itemize their tax deductions or whose charitable contributions exceed 50% of their gross income would not benefit as they do from the QCD. Many older taxpayers choose to claim the standard deduction, especially since they often have no mortgage interest to deduct. By using a QCD these taxpayers won’t miss out on a deduction for charitable giving.
Also, if the taxpayer makes a QCD then he doesn’t have to include the distribution as income for determining AGI for any phase-outs of deductions. Not having to declare the income from the IRA withdrawal may also be beneficial if it would cause an increase in Medicare premiums or taxable Social Security income.
If making a charitable contribution from your IRA is appealing to you, act now. Make sure your request is processed correctly, and don’t take the risk of incurring any penalties for not taking the proper RMD amount. For the QCD to be attributable to 2010, it must be made on or before January 31, 2011.