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Case of the Week: IRA Distributions and Charitable Organizations

Editor's Note: This post has been updated to reflect the enactment of H.R 5771, which reinstated QCDs for 2014.

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 

There are two options available to IRA owners and beneficiaries that would allow them to reap tax benefits for distributions given to qualified charities. The first is a straight-forward tax deduction and the second is a qualified charitable distribution (QCD).

  • First, if an IRA owner takes a taxable IRA distribution and donates it to a charitable organization, that individual may be eligible to deduct the distributed amount on his or her tax return for the year as a charitable contribution if he or she itemizes deductions (Schedule A of Form 1040). Unlike a QCD (discussed next), there is no age requirement associated with this type of charitable contribution, and no dollar limit. The maximum allowable deduction is based on a percentage of the taxpayer’s adjusted gross income. Please see the IRS Publication 526, Charitable Contributions for additional details.
  • The second option is a tax-free QCD, which 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. QCDs had expired as of 2013, but were recently reinstated for 2014.
  • For QCD purposes, an eligible IRA owner or beneficiary is anyone age 70½ or older who takes distributions from his or her traditional IRA, Roth IRA or inactive (i.e., not receiving ongoing employer contributions) simplified employee pension (SEP) or savings incentive match plan for employees (SIMPLE) IRA.
  • Generally, qualifying charitable organizations include those described in §170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, foundations, hospitals and medical facilities). Excluded are supporting organizations described in IRC §509(a)(3) and donor-advised funds described in IRC §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 and count it toward 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 same amount.
  • Be aware there are special IRS Form 1040 reporting instructions that apply to QCDs.

Conclusion

IRA owners and beneficiaries who give distributions to qualifying charities may be eligible to receive an added tax benefit. Those who are interested should discuss the rules for charitable contributions and QCDs with their tax advisors.

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. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.

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