As we find ourselves in the full swing of year-end tax planning, the following information originally posted in March of this year is worth repeating, particularly to help certain taxpayers meet their philanthropic goals and reduce their tax liability.

Under the Protecting Americans from Tax Hikes (PATH) Act passed in late 2015, the rule allowing for tax-free, qualified charitable distributions (QCD) of up to $100,000 annually from an Individual Retirement Account (IRA) was retroactively reinstated to January 1, 2015, and made permanent.

What Qualifies for QCD Treatment?

For an IRA distribution to qualify as a QCD, two criteria must be met:

1. The IRA owner must have attained age 70 ½ prior to the distribution, and
2. The distribution must be made directly from the IRA custodian to the charitable organization.

Taxpayers must not take possession of the funds personally, it must go directly to the charity either via a trustee to trustee transfer or check written directly from the IRA to the charity. Donor-advised funds and private foundations are ineligible to receive QCDs.

What Is the Tax Benefit of a QCD? (Why Should I Bother?)

QCDs of up to $100,000 are excluded from a taxpayer’s income and can be used to satisfy a taxpayer’s required minimum distribution. While the income is excluded from the taxpayer’s return, the taxpayer will not receive a charitable deduction for the transfer to charity.

Instead of performing a charitable distribution of assets, suppose a taxpayer took a taxable IRA distribution then contributed that amount to charity. The taxpayer would report taxable income in the amount of the IRA distribution then a charitable deduction for the contribution. The extent to which the charitable deduction will offset the taxable IRA income will depend upon a taxpayer’s individual facts and circumstances, including their adjusted gross income (AGI), their states’ tax laws and whether they were subject to the alternative minimum tax (AMT).

Taxpayers with high AGI and few other itemized deductions may be subject to significant phaseouts of their itemized deductions for federal purposes. In those cases, a QCD may provide a meaningful federal income tax benefit. Additionally, taxpayers living in a state such as Ohio, which does not allow for charitable deductions at the state tax level, may achieve a state tax benefit from the QCD strategy.

Who Should Consider a QCD?

Philanthropically minded taxpayers aged 70 ½ or older who have IRA assets not needed to support their lifestyle may benefit from a charitable distribution of IRA assets. The QCD can help taxpayers meet their philanthropic goals and reduce their tax liability.

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.