As was noted in our prior blog post (Summary of Reinstated Tax Incentives for Individuals and Businesses), one of the tax provisions having been made permanent in the PATH Act of 2015 relates to charitable contributions made directly from IRAs.  As we stated:

The new legislation

[the PATH Act] permanently enables taxpayers who are 70 ½ or older to make contributions up to $100,000 from their IRA directly to charitable organizations.  This is valuable in that such contributions go towards satisfying the taxpayer’s required minimum distribution from their IRA, while at the same time excluding the contribution amount from taxable income.

Charitable contributions made directly from IRAs as referenced above are referred to as “qualified charitable distributions,” or QCDs.  While taxpayers often make charitable contributions with funds from their IRA, such contributions may not be deemed a QCD and thus would not be eligible for this special treatment.  The qualifications for a distribution to be considered a QCD are as follows:

  • Only individuals age 70 ½ or older may make QCDs.
  • The charitable donation must be made as a direct contribution from your IRA trustee to the charity. The contribution will not qualify as a QCD if the funds are first distributed to a taxable account (e.g. bank account) controlled by you.  The IRS does not provide any relief should a transfer be done incorrectly, so please discuss this carefully with your IRA custodian.
  • The charitable donee (recipient) must be an organization otherwise qualifying for tax-deductible treatment by an individual donor (other than private foundations, donor-advised funds or Code Sec 509(a)(3) supporting organizations).
  • The charitable organization receiving the donation must provide a contribution acknowledgement in the same manner as would be provided to an individual donor.
  • QCDs are only eligible from an IRA funded by the taxpayer; contributions from an inherited IRA are not eligible for this special treatment.

QCDs are preferable over simply taking an IRA distribution and then donating the proceeds to charity for a number of reasons, stemming from the fact that standard IRA distributions are generally taxable and must be included in adjusted gross income (AGI) before the charitable deduction is applied.  Taxable IRA distributions often result in additional Social Security benefits becoming taxable, and also result in increased AGI limits for various itemized deductions (including medical expenses, investment expenses, etc.).  Additionally, the deduction for charitable contributions is broadly limited to 50% of a taxpayer’s AGI, meaning the full benefit of a charitable deduction made from IRA proceeds may not even be absorbed in the year made (although unused charitable deductions may carry forward for up to 5 years).

A QCD, on the other hand, does not increase AGI – it is excluded from AGI entirely – and thereby avoids the aforementioned increased taxation of Social Security benefits and the negative impact on certain itemized deductions.

Perhaps most important is the fact that QCDs automatically fulfill a taxpayer’s “required minimum distribution” (RMD) in the year of contribution.  Thus, a taxpayer who doesn’t otherwise need a RMD to live on can contribute to charity without first absorbing the tax impact of the distribution itself.

If you believe a charitable distribution from an IRA might be appropriate for you or a loved one, please feel free to contact us; we will be happy to discuss any time!