Tax Breaks for IRA Distributions When Donating to Charity

21 04 2011

by Michelle Ash,

We’re all looking for legitimate ways we can save money on taxes, right?  Well, if you’re looking to have an extra bang-for-your-buck with a charitable donation, read on.

In a moment, I’ll talk about the specifics of a nice tax break that those over the age of 70.5 (who take Required Minimum Distributions from IRA’s) can use for making charitable donations.  But even if you’re  a) under the age of 70.5, or b) not looking to make a charitable contribution from your IRA, there might still be some helpful information in this article for you.

Charitable Donation Basics:

Anyone can give a charitable donation.  Without citing any particular statistic, I’ll just say that in these difficult economic times, I believe any charity would welcome a donation of any size.

For many Americans, though, a charitable donation can also mean a nice tax break.  Who gets the tax breaks?  The short answer is anyone who itemizes their deductions on Schedule A has the opportunity to take a charitable deduction.  Without getting too detailed, though, it’s important to know that deduction of charitable donations is limited to a maximum of 50% of your adjusted gross income (AGI).  That doesn’t mean you can’t give more away – it just means you don’t get a tax break for it.  Most Americans who give charitable donations don’t make them from their Individual Retirement Arrangements (IRA’s) – after all, those are for use in retirement, right?  Instead, most Americans just make a donation from cash flow, or maybe from an asset they want to give away, like an old car.  Age doesn’t matter with regards to making these types of donations.  The IRS will give you tax deductions for charitable contributions of this sort, regardless of your age.

The Qualified Charitable Distribution (QCD)

But for those who are age 70.5 and above, and who want to use those required IRA distributions for a charitable donation, there’s an extra tax break.  If the RMD is pulled out and sent directly to the charitable institution, amounts up to $100,000 may be excluded from the taxpayer’s gross income.  These distributions are  not subject to the normal 50% of gross income limitation, so potentially they could give higher than 50% of AGI in total and  still receive a tax break.  This provision exists for each taxpayer, so if a husband and wife each want to contribute, they can each do so up to $100,000 each from their own IRA’s – for a total of $200,000 combined.

Important details to follow to make sure the transaction is qualified:

  • Contributions must be from traditional or Roth IRAs.  QCDs cannot be made from employer-sponsored IRAs (Simplified Employee Pensions (SEP-IRAs) and Savings Incentive Match Plan for Employees (SIMPLE-IRAs), or from defined contribution retirement plans (for example, 401(k) plans or 403(b) plans).
  • Individuals must be older than 70.5 when the QCD is made.
  • Charities must be eligible to receive tax-deductible charitable contributions.
  • The distribution must be a trustee-to-trustee transfer; that is, a direct transfer from the IRA to the charity.
  • The distribution first comes from taxable funds, then from any nondeductible IRA contributions. Previously, distributions would have been allocated proportionately between deductible and nondeductible contributions.

How long are the QCD tax breaks available for?

Under current law, the deadline for using the Qualified Charitable Deduction rules for an IRA RMD  are until December 31, 2011.  Note, too, in the rules above that the RMD money must go directly to the charitable institution.  If you’ve already taken your RMD out of your IRA for the year, and wish you had done it this way,  it’s unfortunately too late, at least according to the current tax laws.  You cannot put the money back in your IRA and remove it again – such an attempt just won’t work.   You can still give that money away to charity, but it won’t be excluded from your gross income and it will be subject to maximum charitable gift deduction limitations.

Will this provision be extended into future years? 

At present I haven’t seen any information on that subject.  The current rules have been extended from previous years of law in 2007 and then 2009, so it seems likely that an extension might be under future consideration.  I would bet if the charities had things their way, they’d probably advocate for an extension, as it’s likely that only Americans who are required to make IRA withdrawals but don’t need the money are the ones using this rule.  Do charities have lobbyists who advocate for this kind of stuff?  I don’t know, but it sure would make sense to me!

Disclaimer:  This blog article is not personal tax advice.  Please consult your tax professional for personal, specific tax information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.




6 responses

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[…] Tax Breaks for IRA Distributions When Donating to Charity … – Apr 21, 2011 · How long are the QCD tax breaks available for? Under current law, the deadline for using the Qualified Charitable Deduction rules for an IRA RMD are until …… […]

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[…] Tax Breaks for IRA Distributions When Donating to Charity … – Apr 21, 2011 · How long are the QCD tax breaks available for? Under current law, the deadline for using the Qualified Charitable Deduction rules for an IRA RMD are until …… […]

23 11 2011
Fran Cahill

Thank you for such a clear statement. What is the reason, in your opinion, why 403(b) is excluded? A number of us in the public education field would like a comparable rule with 403(b) plans.

23 11 2011

Hmm… good question. I would bet (since you asked for my opinion) that since 403(b) plans are specifically for non-profits (education, health industry, and religious organizations) that it might seem a bit of a conflict of interest if there were tax breaks for these types of plans. From an objective perspective – it might seem as if the government was influencing employees of these organizations to donate to these types of organizations. Since they work for these organizations, there might be undue influence from directors or executives on the “rank and file” employee.

In the event an employee truly wanted to contribute from a 403(b), the easiest way to do this would be to simply execute a tax-free rollover of funds from the 403(b) to an IRA. From the IRA, then donations to the charity would be tax-advantaged.

27 05 2011

Very nice site!

29 04 2011

Thank you for providing such useful information. The non-profits can use any help we can get.

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