Charitable contributions and gifts make up a large aspect of many estates. As with everything, there is a right way to give and a wrong way to give. Planning can help ensure that your gift is properly funded and distributed according to your wishes. This planning may include using qualified funds while you are living.
The 411 on QCDs
Individuals age 70 ½ or older are allowed under IRS rules to make direct charitable gifts from an IRA of up to $100,000 to public charities. These gifts are called qualified charitable distributions (QCDs) and are not required to report this distribution as taxable income on their federal income tax return. Historically, this tax break was voted upon and approved on an annual basis; as of 2015, it has been permanent.
Timely & Direct
The distribution must be made directly to the appropriate designated charity. Distributions which are paid out to the account owner and then given to the charitable organization are not QCDs and are counted towards the taxable income of the account owner.
Last minute distributions may not be counted for the desired tax year. Distributions which are not received by the charity by midnight December 31st will be counted for the following tax year. Generally, direct distributions are a time-saving measure. However, many account administrators will not make last minute distributions. It is human nature to wait until the last minute and to better manage the influx of requests at year end, many companies require extended processing time for distributions taken late in the year.
Tax Consequences
Qualified charitable distributions cannot be used as a charitable deduction on a personal tax return. This lack of a deduction may seem odd until you consider the benefits of not having to pay income taxes on the distribution. For many people, this evens out in the long-run.
Distributions from employer-sponsored retirement plans are not QCDs and will not be income tax-free. Only distributions from traditional or Roth IRAs are eligible to be classified as qualified charitable distributions.
Giving from the Heart
Additionally, QCDs must not be life-income gifts and must be paid to the charity without receiving anything in return. The entire $100,000 donation could be considered taxable income for the donor if something is received in return, such as a $25 dinner.
Most Americans consider their IRAs to be their largest assets and many IRAs are left untouched. By using qualified IRA funds as charitable distributions, many people are able to make donations while still living without having to suffer the taxes.