IRA Qualified Charitable Contributions Reinstated, Made Permanent

Posted by Christian Wynns on June 20th, 2016

In year-end legislation, the Consolidated Appropriations Act of 2016 made permanent qualified charitable distributions from individual retirement accounts.  Because qualified charitable distributions are finally permanent, now’s a good time to review the rules.

Benefits

A qualified charitable distribution permits annual direct transfers to a qualified charity totaling up to $100,000 of tax-deferred IRA savings. Qualified charitable distributions offer advantages over taking a taxable IRA distribution and then contributing the proceeds of that distribution to a charity. That’s because taxable IRA distributions must be included in adjusted gross income.

Requirements

* Only individuals who’ve attained age 70 ½ may make qualified charitable distributions.

* The charitable donee must be an organization that qualifies for a charitable income tax deduction of an individual, other than a private (grant-making) foundation, a donor-advised fund or a supporting organization under Internal Revenue Section Section 509(a)(3).

* The charity that receives the donation must provide the same contribution acknowledgment needed to claim a charitable income tax deduction. Failure to obtain the acknowledgment will quash the qualified charitable distribution.

* Qualified charitable distributions may be made from any IRA or individual retirement annuity, but not from a simplified employee pension, a simple retirement account or  an inherited IRA.

Making The Contribution

To make a contribution, contact the intended charity to determine the exact payee name for the check. Then, using that name, instruct your IRA trustee or custodian to make a transfer from the IRA directly to charity. Many trustees and custodians already have forms and procedures in place to make this transfer.  Be sure to obtain a letter of acknowledgment from the charity.

NOTE: It won’t qualify if the trustee or custodian makes the mistake of putting IRA money in a non-IRA account of yours as an intermediate step. It won’t qualify if the check is made out to you. The law doesn’t provide a way to correct mistakes.

More Than One IRA

A qualified charitable distribution can only consist of deferred taxable income residing in an IRA. Because the goal is to avoid income recognition resulting from an IRA distribution, there’s no need to confer qualified charitable distribution status on what would otherwise constitute a tax-free IRA distribution. Fortunately, the qualified charitable distribution rules provide that IRAs are aggregated to determine how much deferred taxable income is treated as passing to charity.  The amount of the transfer is deemed to consist of deferred taxable income, potentially from all IRAs. But, helpfully, there’s an ordering rule. The qualified charitable distribution comes first from the contributing IRA, then from any other IRAs. Only after the charitable transfer exceeds the sum of deferred income in all IRAs is there a transfer of funds having income tax basis.

Cash vs. Property

Because the tax code always deems only deferred taxable income to have been distributed in a qualified charitable distribution, it won’t matter whether cash or property is transferred to the charitable donee, as long as there’s at least as much pre-tax value to cover the contribution.

See your local tax advisor for more information.

Source:  Michael J. Jones, WealthManagement.com