2016 Tax Breaks – Part 3
By Diana J. Batchelor
This third and final blog in the 2016 Tax Breaks series discusses qualified charitable distributions (QCDs) from individual retirement accounts, in which was made permanent in year-end legislation, the Protecting Americans from Tax Hikes Act of 2015. Because the QCD is now permanent, it is important to review the rules.
Benefits of QCDs
A QCD permits annual direct transfers to a qualified charity for a maximum contribution of $100,000 from a tax-deferred individual retirement account (IRA). Funds that have been distributed from the IRA to the IRA owner and are then contributed to charity do not qualify. QCDs offer several advantages that a taxable IRA distribution cannot when distributed to the account holder and then they contribute the proceeds of that distribution to a charity. That’s because taxable IRA distributions must be included in adjusted gross income. As a result, QCDs will assist in avoiding the following types of issues:
- Income taxes on Social Security benefits can increase
- Adjusted gross income (AGI) limitations on annual charitable deductions can defeat current deduction of the charitable contribution of IRA distribution proceeds (carryovers to a limited number of future tax years is available)
- AGI limitations trimming itemized deductions can apply
- Medicare insurance premiums can increase.
Another important aspect, the QCD automatically satisfies the required minimum distribution (RMD) for the year when the QCD is made. That’s a real advantage for a charitably minded IRA owner who doesn’t need the RMD as retirement income.
- Only individuals who have reached age 70½ and are required to take a RMD from their IRA may make QCDs.
- The charity that receives the donation must be a qualified charity and provide the same contribution acknowledgment needed to claim a charitable income tax deduction. Failure to obtain the acknowledgment will quash the QCD.
- QCDs may be made from any IRA or individual retirement annuity, but not from a simplified employee pension, a simple retirement account, or an inherited IRA.
Making the Contribution
There are a few logistical suggestions we would offer to make sure your charitable giving effort goes through without any complications.
- To make a contribution, contact the intended charity to determine the exact payee “name” for the check and the address of said charity to obtain the charity’s EIN#.
- Instruct your IRA trustee or custodian to make a transfer from the IRA directly to the charity using the name and EIN# you have obtained for them. Many trustees and custodians already have forms and procedures in place to make this transfer. (FYI, It won’t qualify if the trustee or custodian makes the mistake of putting IRA money in a non-IRA account of yours as an intermediate step. It won’t qualify if the check is made payable to you. The law doesn’t provide a way to correct mistakes.)
- Be sure to obtain a letter of acknowledgment from the charity.
- The accounting for your tax return will not be done by the trustee or custodian. You will receive a 1099R indicating the amount of your distribution from your IRA. It will be your responsibility to subtract the amount of the QCD from the 1099R and report the balance as the taxable amount of your IRA distribution, i.e., 1099R = $5,000, your QCD = $5,000, which makes the taxable amount = 0.
If you have any questions about how a QCD can benefit your tax situation, please contact Lifetime Wealth.