The IRS extends a major tax break. Thanks to the American Taxpayer Relief Act of 2012, charitable IRA gifts are once again allowed in 2013. An IRA owner aged 70½ or older may gift up to $100,000 this year to either a 170(b)(1)(A) public foundation or a 501(c)(3) charity. Congress may elect to extend this opportunity in 2014 and subsequent years.
What do you gain by doing this? The possible tax benefits of a qualified charitable distribution (QCD) from an IRA are threefold.
A QCD counts toward your RMD, but it doesn’t count as taxable income. If you dread mandatory IRA withdrawals and the taxes that come with them, you should know that a charitable IRA gift can be used to satisfy all or part of the annual Required Minimum Distribution. At the same time, the contribution amount is excluded from your gross income. With higher tax rates and surtaxes kicking in this year, reducing your AGI may be a priority.
A QCD can help you reduce the size of your taxable estate. Most of the money in a traditional IRA will eventually be taxable. Donating some or all of these assets to charity will lower your taxable estate dollar for dollar. (As you can surmise, QCDs are more beneficial to traditional IRA owners than Roth IRA owners from this standpoint.)
A QCD could also help you contend with charitable donation limits. You may reach a point where you would like to donate an amount greater than 50% of your AGI to charity. Normally, the IRS doesn’t allow that – but charitable IRA gifts don’t count against that 50% limit as they aren’t included in a taxpayer’s gross income. While a charitable IRA gift isn’t tax-deductible, you may not itemize to begin with – many retirees just take the standard deduction.
How do you do this? To realize most or all of these tax perks, the gift has to take the form of a qualified charitable distribution (QCD), alternately known as a trustee-to-trustee transfer or IRA charitable rollover. In other words, the financial firm serving as the trustee of your IRA writes a check directly to the charity. A financial professional you know and trust can help you fill out the accompanying paperwork.
If the IRA trustee makes the check payable to you and you deposit it and write a check for the equivalent amount made payable to the charity, it is a taxable event and the whole purpose of the charitable IRA gift is defeated. Should you make that blunder, you will have to declare the income and just take a normal charitable deduction on the donation.
What does the fine print say? To make a QCD, you have to own an IRA and be age 70½ or older. You can’t make a QCD from an employer-sponsored retirement account such as a 401(k) or 403(b); in fact, you can’t make a QCD from a SEP or Simple IRA either.
The QCD can’t be made in a way whereby you would derive benefits from the charity or foundation later. It can’t become the basis of a charitable remainder trust or a gift annuity, for example. A QCD also can’t be made to a donor-advised fund (via which the contributed assets would be invested and grow tax-free prior to the actual charitable donation).
A QCD can’t be a split interest gift. The amount of the QCD must otherwise have been considered taxable income, and you are not permitted to claim a charitable deduction for it.
Help a charity, help your financial situation. If you are well off and don’t really need or want the additional income and income taxes that would result from your RMD, a charitable IRA gift may offer you a solution with the flavor of a win-win – a boon for the charity, a tax break for you and/or your heirs.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.