For years, the rules allowing for a tax-free Qualified Charitable Distributions (QCD) directly from an IRA to a charity has been part of Congress’s year-end tax extenders. This created a scramble for people who wanted to use the QCD but did not know if it would qualify as a tax-free distribution. Finally, the year-end 2015 Protecting Americans from Tax Hikes (PATH) Act made the QCD permanent.
A QCD allows an individual who must take a Required Minimum Distribution (RMD) from their IRA to direct all, or a portion, of that RMD to a charity, thus avoiding the tax on it. For folks who are charitably inclined, this is a terrific strategy that allows them to contribute to a charity while also receiving the benefit of excluding the RMD from their income and reducing their tax bill. Otherwise, RMDs must be included in adjusted gross income. Other benefits of reducing the amount of an RMD by using a QCD include:
- Income taxes on Social Security can decrease.
- Medicare insurance premiums can decrease.
- Avoid itemized deduction limitations that are determined by adjusted gross income.
Now that it is no longer a “wait and see” if the QCD will be allowed at year-end, we can help clients plan with their RMDs during the year. However, there are several rules that must be followed for the distribution to qualify as a QCD:
- The individual must be age 70 ½ or older to make QCDs.
- Distributions made from individual IRAs (including a rollover IRA) are eligible, but not distributions from a SEP or SIMPLE IRA.
- The charity must be an organization that qualifies for a charitable income tax deduction. The distribution cannot go to a private foundation or a donor advised fund.
- The donation has to go directly to the charity. The individual cannot be the payee on the check – the charity must be the payee.
- The donation “must have been eligible for a full deduction,” that is, the individual cannot receive any benefits from the donation.
- Ensure that no tax is withheld from the distribution since the money is going directly to the charity.
- The maximum QCD is $100,000 annually per person. For a married couple, each spouse can do up to $100,000, as long as each taxpayer’s QCD comes from his/her respective IRA.
While a QCD can be used to satisfy an RMD obligation, it is important to note that the RMD is satisfied with the first distribution that comes out of the IRA for the year. Once an RMD occurs, it cannot be rolled back. For example, if an individual has an RMD obligation of $10,000 for the current year, and he/she takes a distribution in March of $10,000; they have satisfied their RMD. They can go ahead and do a QCD, but it will NOT be applied towards their RMD.
Making the QCD permanent allows time throughout the year to plan how an individual wants to take their RMD. For those who don’t need the RMD for living expenses and want to give to charity, it presents an excellent planning opportunity. For more information, visit our website at makinglifecount.com or contact Joni Lindquist –firstname.lastname@example.org, (913) 345-1881.