The most trending tax and financial industry issues.

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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

Charitable Donations From Your IRA

Christmas time and the coming end of the year are historically times of increased giving by many.Included in that is often a last-minute surge in charitable giving, as people are in a more generous mood or maybe thinking about their coming tax bill.

For those who have reached age 70 and a half (don't ask me why the 1/2 - I have no idea), donations can be made to qualified 501(c)(3) charities directly from your traditional Individual Retirement Account (IRA).

Referred to as a "qualified charitable distribution", or QCD, this can be a very smart tax move in many cases. But there are a few basic things you need to know to decide if this is right for you.

The first thing to understand is that QCDs come out of your IRA free of any federal income tax (and in some states, like Arkansas, free of state tax as well), unlike other IRA distributions, which of course are taxable.

But because you are not paying tax on the distribution, you are also not allowed to claim the donation as an itemized deduction. This makes sense really because to be able to do both would amount to a double tax benefit, and we know Uncle Sam isn't going to allow that!

To be a QCD, the following requirements must be met:

  1. It must be from an IRA, and as stated earlier it must be after the IRA owner or beneficiary has reached age 70 and a half.
  2. It must go directly from the IRA custodian/trustee to a qualified charity. A check issued by the custodian/trustee and payable to the charity meets this requirement even if you personally see that the check gets to the charity. However, be careful, because a distribution made out personally to you will NOT fit the bill and will be a taxable distribution to you.
  3. It must meet all other rules for a 100% deductible charitable donation. This can be a big surprise if you are not careful. For instance, only the portion of a donation that exceeds any benefit you receive in exchange for the contribution is deductible. So, if you receive any benefits that would reduce the deductible donation per the tax law, say such as books, DVDs, etc., you donít have a QCD.
  4. It must be a distribution that would be taxable except for this special rule. This could be a problem for distributions from Roth IRAs or IRAs to which you have made nondeductible contributions in the past (but see below).
  5. Total QCDs are limited to $100,000 for any one year. This limit applies to each person separately, so if you are married and both you and your spouse have IRAs, each of you can make QCDs up $100,000, even if you file joint tax returns.

So why would you want to do a QCD? Here are some of the reasons:

First, because QCDs are not taxable income they are not included in your adjusted gross income (AGI). Because many tax issues are affected by the level of AGI, having a lower AGI can produce tax savings. For example, the taxability of Social Security benefits is affected by how high your AGI is, so using a QCD to make your donations may lower this tax. QCDs are also not subject to the rule that limits your itemized charitable deduction in any one year to 50% of your AGI.

Other tax benefits that may be maximized by having a lower AGI include:

  • medical expenses that are only deductible if they exceed 10% of AGI;
  • miscellaneous itemized deductions that are allowed only if they exceed 2% of AGI;
  • rental estate losses that may not be deductible if AGI is too high.

Also, a QCD allows you to get a tax benefit from your donations while still taking the IRS standard deduction, which may be higher than other itemized deductions, giving you the best of both worlds.

Another reason is that a QCD from your IRA counts as part of the required minimum distribution (RMD) the law makes you take each year. So, you literally could donate up to 100% of your yearly RMD amount, up to the $100,000 limit, upon which you would otherwise have to pay taxes.

Third, and not as big a break under current law as it once was, but QCDs directly reduce the value of your taxable estate.

And lastly, I mentioned earlier the possible problem with IRAs containing nondeductible contributions (and here I am speaking of only non-Roth IRAs). There is a way around this as long as you are careful. If this is you, your IRAs consist partly of a taxable portion and a nontaxable portion. A QCD can be made by taking only the taxable portion (i.e., deductible contributions plus earnings in the accounts) while leaving behind the nontaxable portion (i.e., the sum of your nondeductible contributions). The nontaxable portion can be withdrawn later tax-free by you or your beneficiaries.

Some additional things to consider are that if you have inherited an IRA from the original account owner, you also can do a QCD if you otherwise qualify. Also, it is generally not advisable to make a QCD from a Roth IRA for a variety of reasons.

If you think you may be a candidate for a QCD, it is a good idea to check with a professional tax advisor before doing so to make sure you meet all the rules and that you indeed will benefit in some way.