Using Your IRA for Charities | Ed Slott and Company, LLC

Using Your IRA for Charities

By Joe Cicchinelli, IRA Technical Expert

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If you are thinking about making a charitable donation for this year, you might use money from your IRA to do so. If an IRA distribution is used to make a charitable donation, the IRA distribution will be taxed even though the money went to a charity for a worthy cause. If you are under age 59 ½ on the date of the distribution, you will also be subject to the IRS 10% early distribution penalty, unless there’s an exception such as disability. We covered that exception in an answer to a question in last Thursday's mailbag. 

After you donate the IRA money to the charity, you can then claim a tax deduction for the charitable contribution if you itemize your tax deductions instead of taking a standard deduction. However, the tax deduction is subject to certain limits and might not completely offset the total tax cost of the IRA distribution, especially for high-income taxpayers.

You may have heard about charitable IRA rollovers, known as Qualified Charitable Distributions (QCDs) in the Tax Code. QCDs are often referred to as charitable IRA rollovers because the IRA funds are “rolled over” tax-free to a charity.

QCDs expired last year on December 31. Congress has discussed renewing them for 2012 and there’s a good chance they will be back, but as of today, they aren’t around. Because this is an election year, QCDs will likely not be addressed until late 2012 or early 2013, after the November elections.

Similar to what happened in the past when Congress reinstated QCDs in 2010 (where QCDs made in January of 2011 could be counted for 2010); Congress could again include a special rule that would allow QCDs made in early 2013 to count for 2012. But they haven’t done that yet.

A QCD is a tax-free IRA distribution sent directly to a charity and was limited to $100,000 per IRA owner per year when they were part of law. You could not claim a charitable tax deduction because the IRA distribution was tax free.

Individuals who are using all or part of their required minimum distribution (RMD) for the year as a QCD might want to consider doing a direct transfer to a charity before year end. If the provision is extended by Congress, they will have made a tax-free transfer from their IRA to a charity. If the provision is not extended, they will have to pay income tax on the distribution, which they would have owed anyway as a tax on their RMD, and they will have made a regular charitable contribution.

We will keep you posted on the status of QCDs.

Article Highlights

  • IRA distributions given to charity are taxable
  • Qualified charitable (QCDs) are also known as charitable IRA rollovers
  • Status of QCDs is that they expired last year on December 31, 2011 but Congress might renew them


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