state tax credit on direct charitable contribution from IRA | Ed Slott and Company, LLC

state tax credit on direct charitable contribution from IRA

Individual makes QCD from his IRA. State allows the taxpayer a tax credit because the contribution went to a charitable organization that qualified for the state tax credit. So taxpayer receives a state tax credit for 50% of the amount of the QCD. Assume taxpayer does not itemize his deductions.

Does the receipt of the state tax credit cause the taxpayer to lose the tax free treatment of the QCD or worse yet, does the receipt of the state tax credit cause the IRA to lose its tax deferred status? I thought I remember a speaker state that the IRA owner cannot receive ANY benefit, however minimal, without risking the loss of the tax deferred status of the IRA.

Any thoughts?

  • There is no problem yet. However, the IRS issued proposed regulations last year to address the SALT deduction limit workarounds. These proposed regulation generally reduce the federal itemized deduction by the amount of the state tax credits. See below:
  • https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-charitable-contributions-and-state-and-local-tax-credits
  • Note that there was no mention of QCDs, just itemized deductions at this point. Not sure if the IRS would consider limiting the write off of a QCD in the same manner.
  • I do not believe that tax benefits were ever considered for treatment as receiving a benefit from the donee as would direct donee perks.  Also, no mention of consideration of IRA prohibited transaction rules. There would be plenty of warnings if the IRS proposed Regs were expanded.
 

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