In the waning days of calendar year 2015, the 114th Congress characteristically took last-minute action to address a number of expired income tax provisions. One extended tax provision that has garnered favor among charitable organizations and those individuals seeking to make direct charitable contributions from their Individual Retirement Accounts (“IRAs”) is the Qualified Charitable Distribution (“QCD”) provision of Internal Revenue Code Section 408(d)(8). Distributions from SIMPLE IRA plans, simplified employee pension (“SEP”) plans, or employer-sponsored retirement plans are not eligible for QCD treatment.
Using a QCD, taxpayers may find that making a direct contribution from an IRA to a qualifying charitable organization can provide greater tax savings as compared to the “normal way” of receiving the IRA distribution and then making a traditional contribution. By excluding the IRA distribution from adjusted gross income, certain itemized deductions, tied to adjusted gross income, are increased as a result of the taxpayer’s lower adjusted gross income.
With the December 18, 2015 enactment of the Consolidated Appropriations Act 2016, the QCD rules of the Protecting Americans from Tax Hikes Act of 2015 (Division Q of the consolidated appropriations bill) became a permanent provision of the 1986 Internal Revenue Code, as amended.
For the last several years, taxpayers wishing to avail themselves of the unique provision had to wait until the very last days of the taxable year to see if Congress would extend this temporary provision. Since the QCD rules permit Required Minimum Distributions (“RMD”) to be distributed directly to qualified charities, the chronically late enactment of this provision made it difficult to plan distributions each year. In fact, for calendar year 2012, Congress didn’t get its act together until early January 2013, so special transitional provisions had to be part of the legislation to allow for QCDs to be accorded treatment as having been made on December 31, 2012.
The QCD provision permits IRA owners who are age 70-1/2 or older the ability to transfer, tax-free, directly to qualified charities gifts up to $100,000 per year. The transfer must be accomplished by the IRA trustee directly to qualified charities. Importantly, such distributions are considered as meeting the definition of an RMD for the donor (the IRA owner). Logically, then, gifts made as a QCD do not count as qualifying contributions for purposes of the “Schedule A” itemized deduction.
Using QCDs as a mechanism for reducing income taxes needs to be carefully planned. While other itemized tax deductions will generally be larger using QCD, there are other rules to consider that might wipe out intended tax savings. For example, the ever-present Alternative Minimum Tax eliminates the tax-saving benefits of certain itemized deductions.
One must take the time to select the best distribution technique and tailor it to his/her particular situation. If the taxpaying donor has a qualified IRA account and meets the age requirements, a QCD can be an effective way to carry out the taxpayer’s philanthropic desires. I encourage you to “give it a look” and remember to consider the state income tax implications.