WUNNERFUL, WUNNERFUL

The Qualified Charitable Distribution (QCD), thanks to the "Protecting Americans from Tax Hikes Act of 2015" (aka the PATH Act) now permanent tax law, is a really great tax benefit, with many tax and non-tax perks.

It is truly, as tv band-leader Lawrence Welk (whose program I still watch almost every week on my local PBS station) used to say, “wunnerful, wunnerful!”

A QCD allows IRA owners age 70½ and older to directly transfer up to $100,000 from an IRA account to a qualified charity, tax-free, as part (or all) of their Required Minimum Distribution (RMD) for the year.

Any portion of an RMD that represents a QCD is not included in gross taxable income reported on your federal tax return.  If your total Required Minimum Distribution from your IRA investments for the year is $50,000, and you have made a QCD of $40,000, you only report $10,000 as a taxable distribution.  If the entire $50,000 was used as a QCD you have “0” taxable income to report.

Your will receive a Form 1099-R from the IRA trustee for the full amount of the distribution, which you report on Line 15a of your Form 1040.  But you will enter as “taxable amount” on Line 15b the net amount you received “in hand” after making the QCD, and write “QCD” next to Line 15b.  If the entire amount of the distribution was a QCD you would enter “0” on Line 15b.

The main tax benefit of the QCD is that it turns a normally “below-the-line” deduction into an “above-the-line” deduction, reducing your Adjusted Gross Income (AGI).  There are a multitude of credits, deductions, and exclusions that are phased-out or eliminated based on your AGI. 

Using a QCD to reduce your AGI can also potentially reduce the taxable portion of Social Security or Railroad Retirement benefits, increase deductions for medical and miscellaneous Itemized Deductions and traditional and spousal IRA contributions, reduce the PEP and Pease phase-outs of personal exemptions and total itemized deductions, the NIIT surtax, and the dreaded Alternative Minimum Tax (AMT), and increase education credits.  The bottom line is more money in your pocket and less surrendered to the government.

In many situations, because there is no longer a deduction for mortgage interest due to paying off the mortgage and state and local income tax deductions are reduced by pension exclusions, seniors are unable to itemize.  In such a case using a QCD to make a charitable contribution provides a tax deduction that would not otherwise be available. 

You are not allowed to claim a charitable deduction for the amount of the QCD on Schedule A – the “deduction” has already been claimed by reducing the taxable portion of your RMD. 

QCDs should only be made from a “traditional” IRA.  Qualified distributions from a ROTH IRA are totally tax-free, so there is no tax benefit in a direct transfer of funds from a ROTH account.   The direct tax-free transfer to a charity is also not available from a SEP or SIMPLE IRA, or a 401(k), 403(b), 457, or other employer plan.  However you can first rollover monies from a self-employment retirement account or an employer plan to a traditional IRA tax-free, and then make a QCD from the IRA account.

A QCD may, or may not, also reduce your state income tax liability.  It all depends on your resident state’s unique tax laws. 

Qualifying taxpayers may also want to consider making a direct transfer from a traditional IRA to a charity now, instead of having a cash bequest made from their estate.  Since your beneficiaries are taxed on monies received from an inherited traditional IRA, by making the contributions as a direct transfer you will -

* reduce the tax cost to the beneficiaries of their inheritance,

* reduce the balance in the traditional IRA, which will in turn reduce taxable required minimum distributions,

* get the money to the charity sooner,

* enjoy the appreciation of the charity, and any “naming” or other publicity possibilities, during one’s lifetime, and

* see how the contribution is put to use.

So seniors required to take an RMD who also make charitable contributions – there is really no reason why you shouldn’t make your contributions using a QCD.

TTFN