For most people, using IRA dollars for charity is a two-step process. You take money from your IRA, reporting taxable income. Then, you donate it to the charity or charities of your choice, perhaps claiming a tax deduction for the contribution.
The new PATH law establishes the permanence of qualiﬁed charitable distributions (QCDs), which go directly from IRAs to recipient organizations. They’re available only to IRA owners age 70½ or older. Such individuals can use QCDs every year now, up to $100,000 per year.
Once IRA owners reach age 70½, they usually must take certain amounts of required minimum distributions (RMDs) each year or pay a 50% penalty on any shortfall. QCDs count toward RMDs.
Example: Joyce Harris, age 72, has a 2016 RMD of $20,000. If Joyce, who gives $5,000 to charities each year, makes those donations directly from her IRA, that $5,000 counts toward her RMD for the year, so she’ll only have to withdraw another $15,000 from her IRA in 2016. She’ll report only $15,000 of taxable income, not $20,000, but she won’t get a tax deduction for the $5,000 ﬂowing from her IRA to charities.
Why would Joyce do this? There are several situations in which using a QCD could pay oﬀ. Perhaps most important, Joyce will be able to satisfy her $20,000 RMD obligation yet only report $15,000 of income, thus, reducing what otherwise would be her adjusted gross income (AGI) by $5,000. For some taxpayers, QCDs can eliminate any addition to AGI from their required IRA distributions. A lower AGI, in turn, can oﬀer many beneﬁts throughout your tax return. Our oﬃce can go over your speciﬁc situation to see if using an IRA for donations after age 70½ would be tax-eﬀective for you.