For certain individuals there may be an advantage to making donations to qualifying non-profit organizations using funds distributed from their Traditional Individual Retirement Account (IRA). These distributions, which are passed through to the non-profit organization, are known as Qualifying Charitable Distributions (QCD).
The American Taxpayer Relief Act of 2012 extended the qualified charitable distribution provisions through 2013. A QCD is an otherwise taxable distribution from an IRA owned by an individual who is age 70 1/2 or over that is received by the IRA owner, but then paid to a qualified charity. The IRA owner can exclude from gross income up to $100,000 of a QCD made for a year, and the QCD can be used to satisfy any Required Minimum Distributions (RMDs) for the year.
So when would this concept come into play? First and foremost it would only be considered by those with a significant philanthropic motive, but even then is only advantageous in certain situations.
As previously stated this is only for those IRA owners subject to the required minimum distribution rules, which means they would be age 70 1/2 or older. The next consideration is the limit on the amount of charitable contributions which can be deducted against income to reduce your federal tax liability.
Generally, deductions for charitable contributions are capped at 50 percent of a tax filer's Adjusted Gross Income, which is Line 37 on IRS Form 1040. For most people, especially those a bit younger, donating over 50 percent of their income is not a normal situation. However, for those over age 70 who were financially successful and entering a time in their lives where philanthropy may be more important, this situation could arise.
Let's assume the donor in question has a large IRA balance from which the Required Minimum Distribution each year may be in the $50,000 to $100,000 range or more, but their other sources of income that year were low, or sourced from tax advantaged investments like municipal bonds. If this person had a desire to make a significant donation to a non-profit organization, their tax deduction for the contribution could be limited.
Until the end of 2013 this large donation, up to $100,000, may be made from the IRA distribution (part or all of which can be the required minimum distribution amount) and the full amount will avoid taxation as income. Normally, distributions from traditional IRAs are taxed as ordinary income.
Even better for the particularly generous donor - the QCD does not reduce your ability to make and deduct additional donations up to 50 percent of your Adjusted Gross Income, with the QCD amount excluded. The QCD concept can also help those who don’t itemize deductions on Schedule A of Form 1040. Normally, you must itemize deductions to be able to deduct charitable contributions. But the QCD procedure allows you to shelter the IRA distribution from taxation, even if you use the standard deduction as opposed to itemizing.
In summary, it is a relatively small portion of IRA owners who will benefit form the QCD concept this year, but for those who can it may mean significant tax savings while you support your favorite charitable organizations. Since these situations are somewhat complex, I suggest consulting your professional tax preparer, or financial advisor.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.