In an early-2015 blog, we talked about the option of making gifts to charity directly from an Individual Retirement Account (IRA) to satisfy one’s Required Minimum Distribution (RMD). This strategy is known as Qualified Charitable Distributions (QCDs). Until the Protecting Americans from Tax Hikes (PATH) Act was passed in December of 2015, the rules allowing this had been temporary for nearly a decade. The 2015 PATH Act made permanent the ability for individuals age 70 ½ or older to exclude from gross income up to $100,000 annually in IRA distributions that are gifted directly to a qualified charity. Although no charitable income tax deduction is available when making a QCD, the amount distributed is eligible to satisfy one’s RMD requirements without causing the dollars to be taxed.
What does this mean?
This is another way that your charitable organization can educate its potential donors on ways that they can gift. This gifting strategy would be optimal for a donor that is age 70 ½ or older and must take RMDs from their IRA, but might not actually need the income. QCDs make it possible to sidestep some or all of the taxes they would owe on the distributions and accomplish their charitable giving desires at the same time!
What do you need to know?
There are a few caveats and requirements associated with making charitable gifts from an IRA that are important for you and your potential donor to be aware of:
QCDs can only be done from an IRA and do not apply to other types of retirement accounts such as 401(k)’s, 403(b)’s, or SEP IRAs.
Distributions must be made directly from an IRA to a charity. Make sure the check is payable directly to the organization!
Distributions must occur after the IRA owner has actually turned age 70 ½, not just in the year that the owner is turning 70 ½.
Taxpayers are limited to up to $100,000 of QCDs in a single tax year, but that is a per-IRA-owner limit. Spouses could potentially contribute an additional $100,000 from each of their IRAs to charities.
Who should consider this?
At RegentAtlantic we help our clients donate to charity in the most efficient way possible, and it is our goal to also educate the organizations we work with on the different strategies that exist.
We often advise our clients to gift appreciated securities from a taxable account because there is a “double tax” benefit for them when doing so: these contributions provide an income-tax deduction and also avoid taxes on the associated capital gains for the individual. This strategy is equally beneficial for a tax-exempt charitable organization because they can liquidate the securities upon receipt without any tax liability. However, now that QCDs have been made permanent, there are some instances when it might make more sense to suggest making a QCD over gifting appreciated securities:
- The individual has no highly appreciated securities to donate – or has appreciated securities that they have held for less than 12 months. In that case, the tax deduction will be limited to their cost basis and not the fair market value.
- The individual does not itemize deductions at the federal level. Donating appreciated securities is most effective when you itemize.
- The charitable gift is large. If their appreciated securities gift is valued at more than 30% of their Adjusted Gross Income (AGI), the gift won’t be fully deductible in that year due to annual charitable contribution limitations and a QCD might make more sense.
- The gift is quite small. The QCD might be easier than gifting appreciated securities if the charitable gift is relatively small.
- The individual is in a lower tax bracket. The capital gains tax on appreciated securities would not apply (or be smaller) if they are in a low tax bracket.
- The individual’s income is very high and their itemized deductions are phased out.
Now that Qualified Charitable Distributions have been made permanent there may be an added incentive for individuals to make charitable gifts to your organization. As always, this will depend on their personal situation and it is important to speak with a Wealth Advisor and Tax professional before making any final decisions. Please also feel free to reach out to anyone on our Neighborhood Nonprofits Group with questions on this topic.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.