Since 2006, taxpayers over the age of 70 ½ have been allowed to make a Qualified Charitable Distribution of up to $100,000 per year directly from their IRA to a charitable organization. The catch has been that taxpayers typically must wait until December to find out if the law will be extended for the current year. Those who fit the philanthropist-over-70.5 demographic can rejoice. Congress passed and President Obama has signed into law legislation that makes the Qualified Charitable Distribution a permanent feature of the tax code, retroactive to January 1, 2015. This breaks the cycle of hard-to-plan-around annual patches that Congress is notorious for, and will significantly reduce the number of calls from clients this time of year asking if this law will be extended or not.
While the taxpayer doesn’t receive a tax deduction for the charitable donation, they do get the larger advantage of avoiding income tax on the IRA distribution. As an added bonus, the distribution can be used to satisfy the Required Minimum Distribution (RMD) rules. RMDs mandate that once a taxpayer hits 70 ½, they must begin taking distributions, which come in the form of taxable income to the taxpayer.
When an IRA distribution normally occurs, the money is counted as taxable income, which may cause the following to happen:
-Increase the income taxes you pay on Social Security benefits
-Limit itemized deductions if Adjusted Gross Income (AGI) limits are reached
-Increase Medicare premiums
So clearly a QCD is preferable to taking a normal IRA distribution (or RMD) and paying the income tax. Unfortunately for those taxpayers who have already taken their RMD for 2015, you will not be able to reverse the RMD and direct the distribution to a charity. You’ll have to wait until 2016 to take advantage of the newly permanent law.
We should reiterate that a QCD must be sent directly to the charity, i.e. you can’t request an IRA distribution, have it sent to yourself, and then donate the money to the charity. Clear as mud, right? If you have any questions about this, feel free to give us a call.