Tax–free treatment of Qualified Charitable Distributions (QCDs) from traditional and Roth IRAs has been extended through December 31, 2011.
As long as an individual meets certain criteria laid out by the IRS, this strategy will offer hefty tax savings for individuals and much-needed cash for numerous charitable organizations.
Tax Law Timeline
The Pension Protection Act of 2006 allowed taxpayers age 70 1/2 and older to exclude from their gross income what would otherwise be taxable distributions from their IRA if they were paid directly to a charity.
This law has been extended for the last 4 years, and is currently extended through December 2011 by the Tax Relief Act of 2010.
This tax legislation extends Qualified Charitable Distributions – an IRA distribution paid directly to a charitable organization from IRAs – through the end of this year. QCDs are excluded from the taxpayer’s gross income for federal tax purposes and may be counted toward an individual’s Required Minimum Distribution (RMD) if those minimums have not yet been satisfied.
Guidelines to Determine Qualified Charitable Distributions
- Individuals must be 70 1/2 years of age or older when the contribution is made.
- Contributions must come from traditional or Roth IRAs. According to the IRS, QCDs cannot be made from employer-sponsored IRAs (Simplified Employee Pensions; SEP-IRAs), Savings Incentive Match Plans for Employees (SIMPLE-IRAs), or from defined contribution retirement plans (for example, 401(k) plans or 403(b) plans).
- Charities receiving the contribution must be eligible to receive tax-deductible charitable contributions; 501(c)(3) organizations. This seems rather obvious, but you need to be smart and research the charity prior to your donation.
- The maximum QCD is $100,000; however, a spouse can also make a $100,000 qualified charitable distribution within the same year if the couple files a joint income tax return.
- The $100,000 max limit doesn’t apply to the overall charitable deduction limit. Therefore, individuals are able to make charitable contributions in excess of 50% of their adjusted gross income.
- The distribution must be a “trustee-to-trustee transfer”. This means that the money doesn’t touch your bank account; instead, it goes directly from your IRA account to the charity that you have chosen. A distribution to a recipient other than a charity will not be tax free, even if that recipient donates the money to a charity.
- Qualified distributions for 2011 must be made by December 31, 2011.
Benefits of This Extension
There are three major areas of benefit when dealing with this tax-free extension.
First, the extension gives an incentive for individuals over 70-1/2 to donate. These incentives could possibly be a deciding factor for many people considering what to do with their IRA distributions.
Although the individuals get a tax break, extending this tax legislation benefits charities who are in need of donations by making it easier and cheaper for donors to give. Remember, charities need funds to continue doing good work around the country and around the world.
Second, the tax relief extension benefits the donor by allowing the exclusion of up to $100,000 of the the QCDs from their gross income in 2011. This is the tax-break highlight of the program extension, especially for this last month of the year.
Third, for those of you who have Required Minimum Distributions, QCDs satisfy RMDs that you would normally be forced to receive from your IRA, just as if you had received an actual distribution from the plan. This means your RMD will satisfy your required distribution amounts as well as give you all of the tax benefits of a qualified charitable distribution.
However, you do not get to deduct QCDs as a charitable contribution on your federal income tax return. That’s double dipping.
Why This Extension Is Important To You
Typically, deductions for charitable cash contributions are limited to 50% of a taxpayer’s AGI. Individuals who want to make a large charitable donations above that limitation are able to do so under this extension.
This is an important tool because the QCD’s exclusion from an individual’s gross income provides a solution for making charitable deductions for taxpayers who are not able to itemize their deductions (i.e. they take the standard deduction). If you are a taxpayer over 70-1/2, who is lucky enough to have a paid off mortgage, you may not be lucky enough to itemize your deductions since mortgage interest usually plays a big part in you being able to itemize deductions. If this is the case, paying qualified charitable distributions directly from your required minimum distribution(tax-free) will greatly help your tax situation.
Other areas of importance are that the extension makes this process less time consuming and less expensive. Without utilizing this tax-free extension, an individual would see an increase in paperwork and a decrease in benefits.
Who Should Make Qualified Charitable Distributions?
Typically, there is a limit of 50% of an individual’s Adjusted Gross Income that is available for charitable deductions. Taxpayers who want to make a large charitable donation above that limitation are ideal candidates to benefit from the QCD extension.
Another possible candidate might be someone who desires to make a large charitable donation, but their only financial vehicle is a large IRA balance. In this situation, if the individual took a normal IRA distribution outside of the tax-free QCD extension, they would be subject to fees, taxes, and a litany of other possible consequences (including an increase in taxable Social Security income or a rise in Medicare Part B Premiums).
Other individuals might simply want to donate their entire RMD and still enjoy the tax benefits by making the contribution through the tax-free QCD.
Remember, qualified charitable distributions for 2011 must be made by December 31, 2011. If you decided to make this thoughtful charitable contribution, it will be indicated on your Form 1099-R. Don’t worry, TurboTax will easily guide you to enter the necessary information from your qualified charitable distribution.