Tax payers age 70 ½ or older who are required to take mandatory distributions (RMDs) from their IRAs, but do not need the additional income to meet living expenses, may exclude all or a portion of their RMD from gross income through a Qualified Charitable Distribution (QCD). Last year the Pension Protection Act of 2006 (IRC § 408(d) (8)), which allowed tax payers to make deductible charitable contributions up to $100,000 directly from their IRAs, became permanent through the passage of the PATH Act.
Those who already have a charitable intent may be better served by making a QCD directly from their IRA rather than taking their RMD and subsequently claiming a charitable deduction. This is due to the “above-the-line income treatment” of RMDs, which can indirectly impact certain allowable deductions and phase-in of social security taxation. But, in both cases – a QCD or RMD and subsequent charitable gift – tax payers are able to reduce their taxable estate.
In order to exclude IRA distributions from gross income, charitable contributions must be paid directly to “qualifying institutions” as described in IRC § 170(b) (1) (a). Not included in this description of qualifying institutions are donor advised funds (as defined in IRC § 4966(d) (2)). QCDs do not include distributions from employer-sponsored retirement plans, SIMPLE IRAs, and SEP IRAs. However, transfers from such plans into qualified IRA accounts can be made first, then the distribution can be made directly to the qualified charity.
So, those who are charitably inclined and do not rely on their RMDs to live on, may be able to reduce their taxable income more effectively through direct contributions to qualified charities. Depending on one’s situation, however, the amounts and guidelines for deductibility can get complicated. Here are a few things to keep in mind:
- 70 ½ is the qualifying age
- The exclusion applies only if a charitable contribution deduction for the entire distribution otherwise would be allowable. For example, if the deductible amount is reduced because of a benefit received in exchange, the exclusion is not available with respect to any part of the IRA distribution.
- The charitable institution must be qualified as described in IRC § 170(b) (1) (a)
- The availability of gifting appreciated securities outside of an IRA
With end-of-year tax planning rapidly approaching, this often over-looked planning tactic of making a QCD directly from your IRA may provide a better means of obtaining an income tax deduction while benefiting your charity of choice. Please consult with your Private Wealth Advisor on how this may apply to your personal financial situation.