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Charitable Contributions from Your IRA

contributed catOnce the PATH Act (Protecting Americans Against Tax Hikes) is signed into law, at long last the ability to make a direct contribution from an IRA to a qualified charity will be permanent.

For background – a Qualified Charitable Distribution (QCD) is when an individual (age 70 1/2 or older and subject to Required Minimum Distributions from his or her IRA) makes a distribution from his IRA directly to a qualified charity. This distribution can be used to satisfy the Required Minimum Distribution for the year. The distribution is limited to $100,000 for each year per individual.

The real advantage of this option is that the owner of the IRA doesn’t have to claim the distribution as taxable income on his or her tax return. Any other distribution of pre-tax dollars typically must be claimed as ordinary income, increasing taxes because of the additional income.

In addition, having the increased income can cause other tax credits and deductions to be reduced (since the Adjusted Gross Income is greater). Medical expense deductions, limited to the amount above 10% of your AGI, is one such deduction that is impacted this way. For example, if you had deductible medical expenses in the amount of $10,000 for the year and your AGI is $75,000, you are allowed to itemize $2,500 in medical expenses ($10,000 minus $7,500, 10% of your AGI). If you took a distribution from your IRA to satisfy RMD in the amount of $10,000, your AGI would increase to $85,000 and therefore reduce your deductible medical expenses to $1,500 ($10,000 minus $8,500, 10% of your AGI). Because of this differential, since the QCD is not counted as income at all, this is much preferred to taking a distribution, counting it as income and then making the deductible contribution.

This QCD has been available for several years, but has always been limited to a year or two and renewable by Congress (it has always been renewed, sometimes retroactively). Most recently the provision expired at the end of 2014 and has not been available in 2015 (until the law is signed). Because of this late extension of the provision, often taxpayers don’t know whether the provision will be allowed until very late in the year, and have often already taken their RMD earlier. The PATH Act takes the action of making this option permanent. Now you can plan and make the QCD at any time in the year and know that it’s going to be available.

If you already took your RMD for the 2015 tax year there is no way to undo this fact, but you could still make another distribution directly to a qualified charity if you like. Or you could donate your RMD in cash to the qualified charity, increasing your income by the distribution and then taking the charitable contribution deduction on your tax return.

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