Last Call for Qualified Charitable Distributions?

By Marvin Rotenberg, IRA Technical Expert

The topic of qualified charitable distributions (QCDs) is one we have written about several times here in The Slott Report, most recently last December. Well, it’s time to write about it again as the legislation that allows QCDs is due to expire at the end of this year, absent an extension enacted by Congress. Thus, if you are or will be age 70 ½ or older by December 31, 2011, you definitely need to be aware of QCDs.

QCDs are distributions from IRAs, including RMDs, that go directly to a qualifying charity. They can be made only from traditional IRAs, Roth IRAs and inactive SEP and SIMPLE IRAs of account owners and beneficiaries who are age 70 ½ or older on the day the funds are disbursed. An annual limit of $100,000 applies to each eligible IRA owner or beneficiary. A husband and wife, each with their own IRAs, may transfer a maximum of $100,000 each from their IRAs directly to a qualified charity, effectively providing up to a $200,000 tax benefit to the couple.

With a QCD, individuals get no income tax deduction for the contribution, but the distribution is not added to their income. This reduces their overall adjusted gross income (AGI) for the year in which a QCD is made. For individuals who are already charitably inclined and can qualify, the QCD option is typically the better way to give to charity.

Many IRA owners don’t need the IRA distributions for living expenses. By delaying an RMD until the end of the year, they could benefit from additional tax deferred growth in their IRA. If you have not completed your 2011 RMD, now is the time to consider using a QCD.

Most IRA custodians transfer IRA funds by check or electronic transfer directly to the charity. However, some IRA custodians issue a check payable to the charity, but send the check to the donor for forwarding to the charity. This will qualify so long as the check is delivered or placed in the mail by the custodian by December 31, 2011.

Here are some points to keep in mind when you are considering using a QCD:

1. Only applies to IRA owners or beneficiaries age 70 ½ and over and is capped at $100,000 per person, per year. You must actually be at least age 70 ½ on the day of the distribution.

2. Only applies to direct transfers of IRA funds to eligible charities and not gifts made to grant making foundations, donor advised funds or charitable gift annuities.

3. Can be used to help satisfy a previously made charitable pledge.

4. If you have already withdrawn your annual RMD for 2011 you can’t retroactively treat it as a QCD by giving the money to charity now. However, you can still make a QCD if you otherwise qualify.

5. If more than $100,000 is withdrawn from the IRA and contributed to a charity, there is no carryover to a future year. The excess is taxable income and a charitable deduction may be able to be claimed if the taxpayer itemizes deductions.

6. The contribution to the charity would have to be entirely deductible if it were not made from an IRA. There can be no benefit back to the taxpayer.

7. QCDs apply only to taxable amounts. This is an exception to the pro-rata rule. Only taxable amounts in a Roth IRA will qualify.

8. The charitable substantiation requirements apply, so make sure to get a receipt from the charity for your gift.

Play it smart when it comes to a QCD for 2011: First, don’t miss the opportunity to make one! Plan for it now. Second, use one to satisfy some or all of your RMD for the year. It will be a very tax-efficient move.