Among the many provisions recently extended through the enactment of the Tax Increase Prevention Act of 2014 is one that allows a taxpayer to make a Qualified Charitable Distribution (QCD) from their IRA.

This is excellent news for those who have yet to take their 2014 Required Minimum Distributions (RMD) from their IRAs, as well as those who had instructed that their RMDs be made directly to qualifying charities in anticipation of the provision being extended. The significance of the provision is two-fold in that it gives the taxpayer a degree of control over their Adjusted Gross Income (AGI) while allowing them to achieve their charitable giving goals.

AGI is a key consideration when tax planning, if it is too high it often limits a taxpayers eligibility for certain credits and deductions. It also plays a role in determining whether or not a taxpayer may be subject to the 3.8% Net Investment Income Tax.

Without the extension of the provision, a taxpayer’s RMD would be considered taxable income thereby increasing AGI. If that same taxpayer decides to make a charitable contribution and claim it as a deduction from AGI on Schedule A however, because their AGI is so high, the benefit they receive from the charitable deduction is limited. The increased income would also cause some of their income to be subject to an additional 3.8% tax. Yet, because of the extended provision, if the taxpayer instead makes a Qualified Charitable Distribution from their IRA in satisfaction of her 2014 RMD, the IRA distribution is excluded from taxable income.

Although the taxpayers will not be entitled to a deduction for the charitable contribution on Schedule A, they have essentially received a before AGI deduction on the amount donated. This gives the taxpayers a greater benefit in that they avoid increasing their AGI to such a level that they would be precluded from receiving the full benefit of other deductions, or that it subjects them to additional tax.

Also, in states like Massachusetts where there is no charitable deduction, the use of a QCD essentially gives the taxpayers an above the line deduction (by removing the otherwise taxable income).

For an IRA distribution to be considered a QCD, it must meet the following requirements:

• The taxpayer making the distribution has reached the age of 70½ by the distribution date.
• The distribution was made directly from the IRA to a charitable organization eligible to receive tax-deductible contributions.
• The taxpayer receives appropriate acknowledgement of the gift from the recipient organization.
• The amount of excludable QCD is limited to $100,000 per taxpayer, so a couple married filing jointly could realize a maximum benefit of $200,000.

If you have questions about making a Qualified Charitable Distribution (QCD) from your IRA, please contact us.