Owners of IRA’s who are age 70½ or older have until December 31, 2013, to complete one of the best lifetime charitable giving strategies available: a qualified charitable distribution.
Under Internal Revenue Code Section 408(d)(8)(A), clients who are 70½ or older can make income tax free distributions from their IRA’s to a qualified charity of up to $100,000. These distributions satisfy minimum required distribution requirements and are not subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a charitable deduction. For charitably inclined clients who do not need the required minimum distribution from their IRA’s, use of the qualified charitable distribution technique provides enormous benefits. Note that the provision of the Internal Revenue Code which permits qualified charitable distributions from IRA’s is scheduled to expire on January 1, 2014, so 2013 is the last year to take advantage of this technique unless Congress extends this provision.
Clients should be aware of some of the following key points in connection with the use of a qualified charitable distribution (QCD):
- Only distributions from IRA’s, including ROTH IRA’s, qualify; distributions from 401(k)s, pension plans and others are not eligible.
- The owners of the IRA must have attained 70½ years of age.
- Owners of “inherited” IRA’s can make qualified charitable distributions if they are age 70½ or older.
- The QCD must be made to a qualified public charity; distributions to private foundations, supporting organizations, donor advised funds, charitable remainder trusts or to establish a charitable gift annuity are not eligible.
- A QCD must be made directly by the IRA trustee or custodian to a qualified charitable organization. If the distribution is made to the IRA owner who then contributes the funds to charity, the distribution does not qualify and will be taxable income to the IRA owner. However, if a check from an IRA trustee or custodian is made payable to the charitable organization and delivered by the IRA owner to that organization, then the payment is considered a direct payment by the IRA trustee/custodian to the charitable organization and does qualify as a QCD.
- An IRA owner who makes a QCD in an amount equal to or greater than the owner’s required minimum distribution for a tax year is considered to have satisfied the minimum distribution requirement for that year even though the charity (and not the IRA owner) is the recipient of the distribution.
- A QCD should be made before the IRA owner takes their required annual minimum distribution for 2013.
- A QCD is not subject to withholding since an IRA owner that requests a QCD is deemed to have elected out of withholding.
- The IRA owner may not take a charitable income tax deduction for amounts transferred from the IRA to charity, but the exclusion of the distribution from the IRA owner’s gross income produces a better tax result.
- IRA donors need receipts of the same kind provided for other types of charitable contributions, so the donor needs to obtain appropriate documentation of the gift from the charity.
- The maximum amount excluded from the IRA owner’s gross income is $100,000.
- An IRA owner can use a QCD to satisfy an outstanding pledge to a qualified charity.
- QCDs do not count against the income tax charitable deduction ceilings (50% of adjusted gross income for cash gifts, 30% for gifts of appreciated securities, with a five-year carryover for excess deductions).
If you have any questions regarding the use of IRA Qualified Charitable Distributions, or any other charitable giving strategy, please contact any member of the CECB Estate Planning Practice team.