Written By: Carrie L. Fellon, CFP®, CRPS
Individuals age 70½ or over can transfer IRA assets to a charity tax free while simultaneously satisfying their Required Minimum Distribution (RMD). After initial enactment in 2006 and subsequent suspensions and reenactments, Congress passed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), making permanent Qualified Charitable Distributions (QCDs) from IRAs beginning in 2016.
A QCD is not recognized as income and is not taxable to the account owner, and a charitable deduction cannot be taken. The QCD must transfer directly from the IRA to a qualified charity as defined by the IRS. The IRA owner cannot take possession of the distribution and subsequently donate it to a charity. Donor advised funds, charitable gift annuities, and private foundations do not qualify for a QCD.
Normally, distributions from an IRA result in a taxable event, increasing taxable income and inflating adjusted gross income (AGI). If you itemize deductions on your tax return and give the same amount to charity, your taxable income would be reduced and your AGI would be unaffected. If you take the standard deduction and donate directly to charity, you realize no tax benefit. A QCD allows you to reduce AGI even if you don’t itemize deductions.
Why is it important to reduce AGI? Adjusted Gross Income is the base factor for determining exemption phase-outs, itemized deduction phase-outs, Medicare Part B premiums, taxability of Social Security retirement benefits, Roth IRA contribution eligibility, Medicare surtax on net investment income, and some credit phase-outs.
- You must be at least 70½ at the time of transfer. If you turn 70½ on August 1, you must wait until at least that date during the tax year to make a QCD transfer. Any contribution from the IRA prior to that date will be counted as a normal distribution subject to ordinary income tax.
- IRA beneficiaries who are at least 70½ may also donate via QCD.
- Up to $100,000 per person, per year, may be transferred to a charity. Married taxpayers can each contribute up to $100,000 from their own IRAs, for a total of $200,000.
- Contributions from 401(k) or 403(b) plans, SEP IRAs, and SIMPLE IRAs are ineligible. These accounts would first need to be rolled over to an IRA to be eligible for QCD.
- The charitable contribution can provide no benefit to the taxpayer. You must receive a confirmation letter from the charity indicating that no goods or services were received in exchange for the gift.
Who might benefit most:
- Those whose charitable gifts might not be entirely deductible due to AGI limitations. Normally, charitable giving can only be deducted if it is less than 50% of AGI. Giving via QCD allows you to effectively reduce your AGI even if the gift amount would otherwise be greater than 50% of your AGI.
- Those who do not need all of the income provided by RMDs.
- Those who are charitably inclined and do not itemize.
- Charitably inclined individuals whose IRA distributions would push them into the 15% federal capital gains bracket. By making a QCD instead, they are able to exclude the charitable IRA distribution from taxable income and benefit from 0% federal capital gains tax.
A Qualified Charitable Distribution can be an ideal strategy to fulfill philanthropic desires, satisfy Required Minimum Distributions, and reduce Adjusted Gross Income. Consult your tax advisor and financial advisor for guidance for your personal situation.