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Tax-Free Distributions From IRAs For Charitable Purposes

December 13, 2017 by Chris Thomas
Copeland Buhl

If you are 70 ½ or older and are required to take a required minimum distribution (RMD) from your traditional IRA and intend to make charitable donations, it may be more beneficial to transfer the donation directly from your IRA to the charitable organization.

Individuals age 70 ½ or older may distribute up to $100,000 tax free from their traditional or Roth IRA to a qualified charitable organization without including the distribution in gross income. A qualified charitable distribution (QCD) must be made directly by the IRA trustee to a qualified charitable organization and the entire distribution must otherwise be deductible as a charitable donation even though the individual cannot claim a charitable deduction for the donation. The exclusion is not available if the deductible amount is reduced because a benefit is received, or if a deduction is not allowable because the donor did not obtain sufficient substantiation. QCD’s are considered for purposes of the RMD rules applicable to traditional IRAs to the same extent the distribution would have been considered under such rules had the distribution not been directly distributed.

Married couples can each do up to $100,000 as long as the QCD’s come from his/her respective IRA.

For example, taxpayer A, age 71, has a traditional IRA with a balance of $100,000 consisting solely of pre-tax (deductible) contributions and earnings, with no other IRA. The entire balance is distributed to a charitable organization. As a result, no amount is included in taxpayer A’s income and the contribution is not included in taxpayer A’s charitable deductions.

If the owner has an IRA that includes both after-tax (nondeductible) contributions and pre-tax (deductible) amounts, the pre-tax amounts are deemed distributed first for QCD’s.  To the extent a QCD exceeds the pre-tax amounts, a charitable deduction is allowed for the QCD that is considered to be from after-tax dollars.

Taxpayer B, age 71, has a traditional IRA with a balance of $100,000, consisting of $20,000 of after tax (nondeductible) contributions and $80,000 of pre-tax (deductible) contributions and earnings, with no other IRA. Taxpayer B distributes $80,000 to a charitable organization directly from the IRA. All of the $80,000 contribution is eligible for QCD treatment. No amount is included in taxpayer B’s income and the contribution is not included on taxpayer B’s charitable deductions.  The remaining $20,000 in the IRA is now considered to be entirely after-tax dollars.

If instead of doing a QCD, taxpayer B received the $80,000 IRA distribution and then contributed to a qualified charity, under the IRA aggregation rule, the nontaxable portion of taxpayer B’s distribution would be $16,000, determined by multiplying the amount of the distribution ($80,000) by the ratio of the nondeductible contributions to the account balance ($20,000/$100,000). Accordingly, $64,000 of the distribution would be included in Taxpayer B’s income, and the full $80,000 of charitable deduction on schedule A.

A QCD may benefit lower income taxpayers as well as upper income taxpayers. If a single taxpayer is claiming the standard deduction, receives social security and utilizes the QCD, the QCD not only reduces AGI, it may reduce taxable social security benefits, resulting in an amplified tax benefit.

 

Amount of QCD $0 $1,000 $3,000 $5,000
Taxable Interest $10,000 $10,000 $10,000 $10,000
Taxable IRA $20,000 $19,000 $17,000 $15,000
Taxable 1099-SSA $20,000 $9,600 $8,750 $7,050 $5,350
AGI $39,600 $37,750 $34,050 $30,350
Tax $3,691 $3,414 $2,859 $2,304
Savings $0 $277 $832 $1,387

 

The QCD provision also applies to beneficiaries of inherited IRA’s. The beneficiary must make the distribution after the age of 70 ½, same as the original owner. The age of the decedent is not applicable.

While it is permissible, there is usually no benefit from a QCD distributed from a Roth IRA. Roth IRA distributions are typically already tax free for someone over 70 ½. Taxpayers would deduct the charitable donation on schedule A if the QCD is made from a tax-free Roth IRA distribution.

Please contact Copeland Buhl & Company PLLP at 952-476-7100 to discuss any questions or potential benefits of doing a QCD.

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