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Financial Planning > Charitable Giving > Charitable Giving Deductions

Using the qualified charitable distribution: 5 IRA scenarios

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Back in 2006, Congress passed legislation enabling clients to make charitable donations directly from their IRAs, but there was an unfortunate twist: the law’s qualified charitable distribution rules would sunset every few years.

That allowed many wealthy Americans to make donations from their IRAs. But the sun-setting also made long-term planning difficult, since no one could be sure that this provision would be around 10 or 20 years into the future.

That’s all changed. The budget deal that Congress reached back in December made the QCD provision permanent, enabling charitably inclined clients to make sizable, long-term arrangements.

So the question arises: Who is best positioned to take advantage of the QCD? Some clients could simply include their IRA distribution in their gross income, then donate the distribution to a charity and take the tax deduction. But without the QCD, that strategy only works for taxpayers who whose charitable contributions are less than 50 percent of their gross income.

Who else can benefit from this? If your clients find themselves in one of following 5 situations, they may wish to know more about the QCD:

(1) People needing to reduce their adjusted gross income. The provision allows IRA holders aged 70½ or older to make direct donations of up to $100,000 annually without first taking taxable withdrawals from their accounts.

That means households can make larger contributions before hitting the maximum tax deduction. Perhaps the most significant benefit: the amount of the donation is not included in AGI.

(2) Clients who don’t need to take their IRA distributions for living expenses. Anything the client donates through a QCD counts as part of the annual required minimum distributions that must be taken from IRAs starting at age 70½. So IRA owners who do not need the distributions for income could make use of the tax benefit.

(3) Only individuals who’ve attained age 70½ may make QCDs. If the client reaches that age during the course of the year, they must wait until after their half-birthday to make the QCD transfer.

Clients who want to donate more than the prescribed limits to charity. The $100,000 maximum QCD does not apply to the charitable deduction limit. This may be able to help some clients make charitable contributions in excess of 50 percent of their adjusted gross income.

(4) Clients with stock that hasn’t appreciated much. Anything that is donated to charity via a QCD will be considered deferred taxable income. Donating appreciated securities directly to a charitable organization provides a double tax benefit. Not only are the contributions deductible, but no tax is owed for the appreciation in the securities.

A QCD doesn’t provide the same benefit. But if the appreciated value of the stock is small (or even negative), the client might as well take advantage of the other benefits the QCD offers.

(5) Clients who do not already donate to donor-advised funds. The only eligible recipients of QCD donations are public charities. It’s also worth pointing out: The procedure is fairly exacting. To make a contribution, the trustee or custodian for the client’s IRA must make a transfer from the IRA directly to charity. The money must come directly from the IRA; the transaction doesn’t qualify if the trustee or custodian puts the IRA money into a non-IRA account of the client’s, such as a checking account, before the money goes to the charity.

The law also doesn’t provide a way to correct mistakes, so it has to be done correctly the first time. It’s critical to get a letter of acknowledgment from the charity so that there’s a record of what happened should the IRS ever decide to investigate the transaction.

Most clients won’t fall under all of these parameters, so there will be a small population that is able to take advantage of the new permanence of the QCD. But all clients with IRAs, and all those making sizable charitable deductions, will appreciate knowing about the strategy.

More features by Tom Nawrocki:

Reverse mortgages in an estate plan: 7 pros and cons

The charitable gift annuity: 10 talking points for donors

529 plans vs. life insurance: 7 questions to ask clients

When foreign wills become a problem



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