Qualified Charitable Distributions: Are They Right For You?

Author: Mark L. Brasee

Is a qualified charitable distribution from your Individual Retirement Account (“IRA”) right for you? Donors benefit by not having to report the IRA distribution as taxable income, although the donor will not be able to claim a charitable income tax deduction for the gift. Many retirees use charitable IRA gifts to achieve charitable goals while satisfying mandatory minimum distribution requirements.

Generally, a qualified charitable distribution is an otherwise taxable distribution from an IRA owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity. Your qualified charitable distributions can satisfy all or part of your annual required minimum distribution from your IRA and does not increase your Adjusted Gross Income (“AGI”). Since both the IRA distribution and the charitable contribution are excluded from income and deduction, AGI is lower than it would be if the contribution were not made. Lowering AGI is more valuable than taking a charitable deduction. An individual can transfer $100,000 annually and a married couple can transfer up to $200,000 from separate accounts.

There are limitations on the types of funds eligible for tax-free transfers of IRA assets. Gifts to Donor Advised Funds, Supporting Organizations and private foundations do not qualify. If an organization does qualify to receive your gift, the payment must be issued directly to that organization. Finally, you need to obtain written documentation necessary to qualify the payment for the customary charitable income tax deduction.

IRA owners over age 70 ½ who do not itemize income tax deductions (i.e., they take the standard deduction) are the likely beneficiaries of this strategy. A real benefit since the recent passage of the Tax Cuts and Jobs Act has increased the number of taxpayers who will not itemize their individual income taxes. Since the charitable deduction is an itemized deduction, normally it has the worst tax consequences from gifts made from IRA distributions – the entire distribution is reported as taxable income but received no offsetting income tax deduction for the gift. For taxpayers who make significant contributions each year, the IRA charitable contribution offers an opportunity to make a contribution that is not limited.

Before making a decision on a qualified charitable contribution, contact the charitable organization of your choice and your tax advisor to see if this gift is right for you.