By FPA member, Timothy Sobolewski, CFP®
Last Updated: January 29, 2013
You may have an interest in giving to charity through outright gifts, bequests, or other “planned giving” strategies (such as charitable gift annuities, charitable trusts, etc.1)
The American Taxpayer Relief Act of 2012 (ATRA) renewed the opportunity for taxpayers over 70½ to make a contribution of up to $100,000 directly to a qualified 501(c)(3) charity from their IRA. This provision expired in 2011, but ATRA gives you the chance to do this until February 1, 2013, and retroactively for 2012. The great benefit of this provision is that you never need to declare that IRA distribution as income; without this rule, you would need to withdraw from your IRA and then take whatever charitable deduction you were allowed on your 1040 – meaning that you would still most likely be responsible for some taxes on your withdrawal.
If you took an IRA withdrawal in December 2012, you will still be able to characterize it as a charitable contribution if you send it in cash to the charity by February 1, 2013, “provided that the contribution would have been a 2012 QCD if it had been paid directly from the IRA to the charity in 2012.”2
If you do this, you must be careful to file properly:
IRA owners who treat a January 2013 payment to a charity as a 2012 QCD will add a note to their 2012 Form 1040, U.S. Individual Income Tax Return, by entering the QCD amount on Form 1040 Line 15a, and entering the letters “QCD” next to Line 15b. The IRA custodian will report the QCD as a normal distribution in the year it was paid.3
You should also note that your 2013 RMD will be based on your December 31, 2012 IRA account value after deducting your January 2013 contribution – a good thing, since you'll then be required to take less than you would have otherwise. Your 2012 QCD, no matter how large, will not count against your 2013 RMD.
Like all IRS rules, there are plenty of strings attached. Here are a few of them:
- You must be at least 70½.
- Contributions must be made only to 170(b)(1)(A) organizations, which are “public” (50%) foundations and 501(c)(3) charities. This excludes donor-advised funds, supporting organizations and private (30%) foundations (except for conduit foundations and private operating foundations). This is clearly something you will need to review with your accountant before sending any checks.
- This only applies to contributions that would otherwise completely qualify for the charitable deduction. This excludes gift annuities, charitable remainder trusts, etc.; the idea is that there can be no benefit to you from the charity, other than their appreciation.
- The contribution must otherwise have been considered taxable income.
- Payment must be made directly from your IRA trustee to the charity (although it is OK if you deliver the check yourself). If the check is payable to you, then it becomes taxable income, and you will be left declaring the income and taking a normal charitable deduction.
- You can take the distribution from any IRA except a SEP or Simple IRA that is still active (receiving contributions). You cannot take it from any employer plans (401k, 403b, etc.)
- You cannot also take a charitable deduction for the QCD.
- The QCD cannot be a split interest gift.
If you are charitably inclined and have an RMD that you will not need, the QCD can be a great way to help a charity while also helping your tax bill. Please remember to seek the advice of both a CERTIFIED FINANCIAL PLANNER™ professional from FPA and your CPA.
FPA member Tim Sobolewski, CFP®, is President of The Financial Planning Center, Amherst, N.Y.