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Case of the Week: Qualified Charitable Distributions from IRAs

The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Pennsylvania is representative of a common scenario involving the tax treatment of IRA distributions that are given to charitable organizations. The advisor asked:

“Is it still possible for my clients to treat otherwise taxable IRA distributions as tax-free if they donate the amounts to charity?”

Highlights of Recommendations

• If an IRA owner donates a taxable IRA distribution to a charitable organization, he or she may be eligible to deduct the amount on his or her tax return for the year if he or she itemizes deductions. There is also a special tax rule for amounts that are considered “qualified charitable distributions” (QCDs) — which are the focus of this Case of the Week.
• Generally, IRA owners must include any distributions of pre-tax amounts from their IRAs in their taxable income for the year.
• A tax-free QCD is any otherwise taxable distribution (up to $100,000 per year) that an “eligible IRA owner or beneficiary” directly transfers to a “qualifying charitable organization.” The American Taxpayer Relief Act of 2012 (ATRA) extended the ability of certain IRA owners (and their beneficiaries) to take QCDs through 2013.
• For QCD purposes, an eligible IRA owner or beneficiary is anyone age 70-1/2 or older who takes distributions from their traditional IRAs, Roth IRAs, or inactive (that is, not receiving ongoing employer contributions) simplified employee pension (SEP) or savings incentive match plans for employees (SIMPLE) IRAs.
• Generally, qualifying charitable organizations include those described in §170(b)(1)(A) of the Internal Revenue Code (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in Code §509(a)(3) or donor-advised funds that are described in Code §4966(d)(2). The IRS has a handy online tool, “Exempt Organization Select Check,” that can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions.
• An eligible IRA owner or beneficiary may exclude a QCD from taxable income, plus count it towards the individual’s required minimum distribution (RMD) for the year. Note that he or she would not also be entitled to an itemized deduction for the amount.
• Be aware there are special IRS Form 1040 reporting instructions that apply to QCDs.

Conclusion

As it now stands, the ability to make QCDs will cease at the end of 2013. IRA owners who are contemplating such donations should speak with a tax specialist before the end of the year. Financial advisors who can demonstrate their knowledge of the special tax benefits available for IRA distributions for charitable organizations set themselves apart from the average advisor and, thereby, win more clients and retirement plan business.
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The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.

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