The Pension Protection Act of 2006 first allowed taxpayers age 70½ or older to make tax-free charitable donations directly from their IRAs. Technically, these taxpayers were allowed to exclude from gross income otherwise taxable distributions from their IRA (“qualified charitable distributions,” or QCDs), up to $100,000, that were paid directly to a qualified charity.
These gifts are also known as “charitable IRA rollovers.” The law was originally scheduled to expire in 2007, but was extended periodically through 2014 by subsequent legislation, and finally made permanent by the Protect Americans from Tax Hikes (PATH) Act of 2015.
How QCDs work for 2016
You must be 70½ or older in order to make QCDs. You direct your IRA trustee to 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 of QCDs in 2016.
Note: You don’t get to deduct QCDs as a charitable contribution on your federal income tax return - that would be double-dipping.
QCDs count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to receive from your IRA, just as if you had received an actual distribution from the plan. However, distributions that you actually receive from your IRA (including RMDs) that you subsequently transfer to a charity cannot qualify as QCDs.
Example(s): Assume that your RMD for 2016, which you’re required to take no later than December 31, 2016, is $25,000. You receive a $5,000 cash distribution from your IRA in February 2016, which you then contribute to Charity A. In June 2016, you also make a $15,000 QCD to Charity A. You must include the $5,000 cash distribution in your 2016 gross income (but you may be entitled to a charitable deduction if you itemize your deductions). You exclude the $15,000 of QCDs from your 2016 gross income. Your $5,000 cash distribution plus your $15,000 QCD satisfy $20,000 of your $25,000 RMD for 2016. You’ll need to withdraw another $5,000 no later than December 31, 2016 to avoid a penalty.
Caution: 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.
Why are QCDs important?
Without this special rule, taking a distribution from your IRA and donating the proceeds to a charity would be a bit more cumbersome, and possibly more expensive. You would need to request a distribution from the IRA, and then make the contribution to the charity. You’d receive a corresponding income tax deduction for the charitable contribution. But the additional tax from the distribution may be more than the charitable deduction, due to the limits that apply to charitable contributions under Internal Revenue Code Section 170.
QCDs avoid all of this, 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.
For more information on qualified charitable distributions and how they could fit into your retirement plan, request a complimentary Q&A session with an advisor at Retirement Advisors of America.
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