© 2016 Joan E. Emery
In December of 2015, Congress passed and President Obama signed into law a permanent (unless Congress decides to change the law at some time in the future) extension of the $100,000 qualified charitable distribution option.
What is a qualified charitable distribution (“QCD”) and how does it work? A QCD is usually used by person who has attained age 70.5, wishes to make charitable gifts, has substantial taxable income, including Individual Retirement Account (“IRA”) income, has determined that he or she does not need all of the annual income, and wishes to take advantage of the QCD tax reduction opportunity .
The following are some of the characteristics of a QCD from an IRA:
1. A person may give up to $100,000 per year. If the IRA owner owns several IRAs and distributions to qualified charities are made from various IRAs during the taxable year, these distributions are aggregated and the $100,000 maximum applies to the aggregated distributions.
2. The person must be age 70 ½ or older at the time of the charitable distribution.
3. If the distribution satisfies the QCD rules, the distribution is excluded from the person’s income.
4. Since the distribution is excluded from income, the person cannot take a charitable deduction for the distribution.
5. The distribution must come from a traditional IRA or a Roth IRA. It cannot come from employer sponsored ongoing SEP IRAs or ongoing SIMPLE IRAs or from other employer sponsored qualified retirement plans.
a. Special rules apply if a traditional IRA contains both deductible and nondeductible contributions.
b. It is possible to make a QCD from a Roth IRA, but from a tax standpoint, it may be more advantageous to take a qualified distribution from a Roth IRA and then make a gift to the charity and seek to take a charitable income tax deduction (since qualified distributions from a Roth IRA are not included income).
c. Even thought distributions from employer sponsored qualified retirement plans are not eligible for QCDs, it may be possible to roll assets from a qualified plan to a traditional IRA and then make a QCD.
6. The amount of the QCD counts toward the amount of the annual required minimum distributions the person must take. However, special rules apply if the person has already received IRA distributions during the year.
7. The distribution must be made directly by the IRA trustee to the charitable organization. Most charities are eligible to receive QCDs, but supporting organizations and donor advised funds are not eligible recipients.
a. If the check from an IRA is made payable to a qualifying charitable organization, the person may deliver the check.
b. The person must receive the same type of acknowledgement of the charitable contribution that he or she would have received in order to claim an income tax charitable deduction for the contribution.
8. If an amount is intended to be a QCD and is paid to a charitable organization, but does not meet all of the QCD requirements, the distribution from the IRA will included in the income of the person and the person will be treated as having made a charitable gift, which is subject to all of the income tax charitable deduction rules.
9. The QCD rules described above relate to federal income tax. Some states and municipalities may require that the QCD be included for state or municipal tax purposes. Since a QCD is not included in the calculation of adjusted gross income and a QCD is not specifically included in the list of additions to income for Illinois income tax purposes, it does not appear that a QCD is included in taxable income for Illinois income tax purposes.
Caveat: It is important to consult with your tax advisor before taking any action, so that your tax advisor can determine how these general rules impact your specific situation.
I am an attorney practicing in the Chicago area.