Qualified charitable distributions (QCDs) from individual retirement accounts (IRAs) are back. The law that allowed QCDs expired in December of 2011, but The American Taxpayer Relief Act of 2012 extends QCDs for 2012 and 2013.
With a QCD, taxpayers over 70½ years of age can donate up to $100,000 per year to charity from their IRAs without including the IRA distribution in income. To qualify for this exclusion, several requirements must be satisfied. Thus, QCDs require careful planning.
Under the new law, qualified taxpayers have the opportunity to make a QCD for 2012 this month, and a QCD for 2013 before the end of the year.
A QCD is a direct transfer from an individual retirement account (IRA) to a charity that is excluded from the IRA owner’s income if the following requirements are met:
- The transfer occurs before December 31, 2013. A special rule allows for QCDs to be treated as 2012 QCDs if the QCD is completed by January 31, 2013. See number 14 below.
- The IRA owner must be 70½ years of age or older.
- The transfer is limited to $100,000 or less per year, per IRA owner (not per IRA).
- QCDs can only be made from IRAs, not employer plans.
- QCD must be made to a qualified charity. Donor advised funds, supporting organizations, and certain private foundations do not qualify for QCDs.
- QCD must be a contribution that would be 100% deductible if paid from other assets. For example, transfers in which the donor receives something of value in return are not QCDs. This rules out, for example, charitable remainder trusts, pooled-income funds, or charitable gift annuities as donees of QCDs.
- QCD is deemed to come first from pre-taxed dollars in the IRA.
- QCD is an exclusion from income. There is no tax deduction available to the IRA owner making a QCD transfer.
- QCD counts against the IRA owner’s minimum required distribution for the year of the transfer. See number 14 below for a special rule regarding 2012 minimum required distributions.
- The state income tax treatment generally tracks the federal QCD treatment, but this must be confirmed state by state.
- The term charitable IRA “rollover” is a misnomer. There should be no distribution of assets from the IRA to the owner/donor. Instead, the assets must be transferred directly to the charity from the IRA.
- Note that the age requirement can be misleading to those familiar with the required distribution rules. The QCD donor must have already attained age 70½ before being qualified to make a QCD. Unlike the minimum required distribution rules, the rule does not apply to all distributions made during the year in which QCD donor attains age 70½ . It only applies to the distributions actually made after 70½ .
- Appropriate documentation must be received from the charity to substantiate the fact that QCD would have been fully deductible if made from other assets of the donor.
- The American Taxpayer Relief Act of 2012 did not become law until 2013. So how can you make a QCD for 2012 under a law that did not exist in 2012? The answer is quickly, but carefully. There are two special rules relating to 2012:
- If you complete a QCD by January 31, 2013, you will be able to elect, under a procedure not yet announced, to treat that as a 2012 QCD, thus allowing you to complete a second QCD later in 2013.
- Also, there is a very narrow rule that applies if you took your minimum required distribution for 2012 in December of 2012. If that is the case, you can contribute that cash to a qualified charity by January 31, 2013 and treat that as a QCD, provided the distribution and contribution would qualify as a QCD, except for the fact that the distribution was not made directly to the charity. (Note, this rule applies only to QCD treatment; it does not allow you to take your 2012 required distribution in January 2013).
Compare QCD with an IRA distribution followed by a contribution to charity. Consider how the income inclusion followed by a charitable deduction differs from the income exclusion of the QCD. For example, IRA distributions increase Adjusted Gross Income, and some medical expense and miscellaneous itemized deduction floors are affected. Roth IRA eligibility may be affected, and the taxability of Social Security benefits may be affected, among other considerations.
For more information, please contact:
Michael G. Riley 216.348.5454
Jeffrey P. Consolo216.348.5805
Roger L. Shumaker216.348.5801
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