President Obama signed the Tax Increase Prevention Act of 2014 (TIPA)1 on Dec. 19, 2014, extending qualified charitable distributions (QCDs) for 2014.
Since 2006, individual retirement account owners over age 70 ½ have been able to direct that up to $100,000 of their IRAs be distributed each year directly to a public charity other than a donor advised fund. This is called a QCD.2
A QCD counts toward the required distribution. It’s not included in income, nor does it qualify for a charitable contribution deduction. The provision for QCDs had expired at the end of 2013.
Year-End Action Required
QCDs were last extended by the American Taxpayer Relief Act of 2012 (ATRA). Before ATRA, QCDs had been scheduled to expire at the end of 2011. ATRA retroactively reinstated QCDs for 2012 and extended QCDs for 2013. Because ATRA wasn’t enacted until Jan. 2, 2013, it contained two provisions enabling IRA owners to utilize QCDs for 2012. ATRA allowed IRA owners to make QCDs in January 2013 and treat them as if they were made in 2012. It also allowed IRA owners to contribute to charity amounts taken from IRAs in December 2012 and treat those amounts as QCDs up to the $100,000 limit on QCDs. TIPA doesn’t contain any similar provisions. IRA owners over age 70 ½ who want to take advantage of QCDs must direct that IRA funds be distributed to charity by year-end. IRA owners who already took required distributions for 2014 can’t get QCD treatment by contributing these amounts to charity.
Tax Benefits
An IRA owner can take distributions from his IRA and contribute them to charity. However, a QCD provides various income tax benefits as compared to taking a distribution from an IRA and contributing the same amount to charity.
- The additional income from a distribution will reduce deductions or credits that are based on adjusted gross income. Examples of this are the floor for medical expenses and the floor for miscellaneous itemized deductions.
- A state might recognize QCDs for state income tax purposes but not allow a deduction (or might not allow a full deduction) for charitable contributions.
- An IRA owner might not itemize deductions.
- An IRA owner’s charitable contributions might exceed the percentage limitations on the deductibility of charitable contributions.
- An IRA owner might be in the notch before 85 percent of his Social Security benefits are includible in income.
- If an IRA owner has basis in his IRA as a result of having made nondeductible contributions, the QCD comes first out of the pre-tax portion of the IRA, thus preserving the basis.
- QCDs don’t affect the reduction of itemized deductions (Pease) or the phase out of personal exemptions.
- QCDs aren’t included in adjusted gross income for purposes of Medicare Part B premiums.
On the other hand, an IRA owner might obtain a greater income tax benefit by contributing appreciated securities to charity, because by doing so, the unrealized appreciation avoids being subject to income tax.
Extension Only for 2014
The extension for QCDs is only for 2014. While there have been proposals to make QCDs permanent, they haven’t yet been enacted. Until then, if the custodian permits, an IRA owner can direct that amounts be distributed directly to charity from the IRA. If QCDs are extended beyond 2014 or made permanent, these distributions may then qualify as QCDs.
IRA owners wishing to make QCDs for 2014 should contact their custodians immediately. Similarly, IRA owners and beneficiaries who haven’t yet taken their required minimum distributions for 2014 should do so before year-end.
Endnotes
1. H.R. 5771, Tax Increase Protection Act of 2014 (113rd Cong., 2d Sess.): https://www.congress.gov/113/bills/hr5771/BILLS-113hr5771enr.pdf.
2. Internal Revenue Code Section 408(d)(8).