Charitable Contributions from IRAs (06/10/2016)

The Pension Protection Act of 2006 first allowed taxpayers age 70 ½ or older to make tax-free charitable donations directly from their IRAs. The Act allowed “qualified charitable distributions” or QCDs to be excluded from gross income that would otherwise be a taxable distribution.  The law was originally set to expire in 2007, but was extended periodically through 2014, and finally made permanent by the Protect Americans from Tax Hikes (PATH) Act of 2015.

Now that the law is permanent, and you are not waiting until December when the legislation would habitually renew the QCDs, you can better plan your distributions.  You simply request that your IRA trustee make a distribution directly from your IRA (other than SEP and SIMPLE IRAs) to a qualified charity.  The distribution must be one that would otherwise be taxable to you.  You can exclude up to $100,000 of QCDs from your gross income in 2016.  If you file a joint return, your spouse can exclude an additional $100,000.  Please note that, although the distribution will be nontaxable, you do not get to deduct QCDs as charitable contributions on your federal tax return.

QCDs count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to receive from your IRA.  At age 70 ½, you need to start taking distributions from your IRA.  If you do not need the funds and plan on making a charitable contribution to an eligible charity, it may make sense to have the RMD or portion of the RMD go directly to the charity.  This will decrease your taxable income.  If you have already received your RMD for the year, your charitable contribution would fall under a deduction on your federal tax return rather than being excluded from taxable income.

Do make sure that your charity is qualified or eligible.  The gift cannot be made to a private foundation, donor-advised fund, or supporting organization (as described in IRC Section 509(a)(3)). The gift cannot be made in exchange for a charitable gift annuity or to a charitable remainder trust.

QCDs are important by providing an exclusion from income for the amount paid directly from your IRA to the charity.  You don’t report the IRA distribution in your gross income, and you don’t take a deduction for the QCD. The exclusion from gross income for QCDs also provides a tax-effective way for taxpayers who don’t itemize deductions to make charitable contributions. 

Lisa A. Dugan

June 10, 2016