We have received many inquiries as to the status of the Qualified Charitable Distribution (QCD) income tax provision for 2014 (the tax provision expired after December 31, 2013). It is widely expected that Congress will act to reinstate the provision retroactively for all of 2014, and in fact, bills currently making their way through the House and Senate would extend it for 2014 and 2015. However, it must be noted that Congress has not acted as of today and has a history of waiting until late in the year to act on this type of “extender legislation.”
What is a QCD?
A Qualified Charitable Distribution (QCD) is a tax-free distribution from an IRA account directly to a qualified charitable organization. The taxpayer must be age 70 ½ or older to qualify and the distribution can be utilized to meet required minimum distribution (RMD) rules. A QCD of up to $100,000 per person is allowed in a single tax year.
When does it make sense to consider a QCD for charitable giving?
A QCD is a tax-free distribution which means you don’t have to include the distribution as part of your Adjusted Gross Income (AGI). However, due to this treatment, you are not allowed to include the amount as part of your charitable contribution deduction on Schedule A Itemized Deductions as this would result in a double tax benefit. It often does not make a material difference whether you complete a charitable contribution via a QCD or through a cash donation since either option reduces your taxable income by a similar amount. However, the following are two examples where making a charitable gift via QCD would provide a substantially better tax benefit versus making a charitable gift with cash:
- The total of your itemized deductions (excluding the charitable deduction) would not exceed the allowable standard deduction based on your filing status.
- The decrease in Adjusted Gross Income (AGI) resulting from making the QCD would have a positive impact on other tax calculations that are influenced by AGI (i.e. taxation of Social Security benefits, threshold for deducting medical expenses or miscellaneous itemized deductions, imposition of the Medicare surtax on unearned income, phase-outs of itemized deductions and personal exemptions).
Please contact us if you have any questions about QCD’s and how they may impact your personal situation. We can also discuss additional tax preferred methods of charitable giving that may be more beneficial to your specific situation such as the utilization of appreciated securities, donor advised funds, or charitable trusts.