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QCD

Qualified Charitable Contributions From Your IRA in 2012 and 2013

Cliff Clavin

With the passage of the American Taxpayer Relief Act of 2012, the provision for Qualified Charitable Contributions (QCD) from an IRA has been extended to the end of calendar year 2013.

Great news, right?  But what does that mean?  Can you make a QCD for 2012?

As you know, the QCD provision is limited to taxpayers who are over age 70½ and thus subject to Required Minimum Distributions (RMD).  In addition, the QCD must normally be sent directly from your IRA custodian to the qualified charity – it can’t be taken in cash and then sent to the charity.  If you qualify and you do the distribution correctly, you will not have to include the distribution on your tax return as income.  You also would not count the charitable contribution as an itemized deduction.

If you happened to send a distribution directly to a charity from your IRA during 2012, it will be treated as a QCD.  This probably didn’t happen in very many circumstances since the QCD provision was not available until passage of the law on January 1, 2013.

Special Provision for 2012

For 2012 distributions there is a special provision:  if you made a distribution in cash during December 2012, you have until the end of January 2013 to send a contribution in any amount up to $100,000, limited by the amount of your distribution during December 2012. You can then treat this contribution as if you had sent it directly to the charity – don’t count it as income, and don’t itemize the contribution.  This distribution could have been your required distribution for the tax year 2012.

If you were waiting on the fiscal cliffhanger, you can still make a Qualified Charitable Distribution during January 2013 – directly from your IRA to the charity – and count it as if the QCD occurred in December 2012.

For 2013

For 2013, the QCD is available through the end of the year under normal rules.  This means that you can, if you’re age 70½ or older, make direct distributions from your IRA to a qualified charity or charities, not counting the distribution as income and not itemizing the charitable contribution.

Guidance on Qualified Charitable Contributions From Your IRA For 2012

United States Congress

January 1, 2013 update: Passage of the American Taxpayer Relief Act of 2012 has extended the QCD through the end of 2013.  See this article for more details.

In past tax years (through the end of 2011) there was a provision available that allowed taxpayers who were at least age 70½ years of age to make distributions from their IRAs directly to a qualified charity, bypassing the need to include the distribution as income.  The law allowed the taxpayer to use a distribution of this nature to satisfy Required Minimum Distributions (RMDs) where applicable.

This law expired at the end of 2011, but in years past Congress has acted very late in the year and retroactively reinstated this provision.  For more detail on how this provision (if not reinstated) can impact your taxes, see the article Charitable Contributions From Your IRA – 2012 and Beyond.

Guidance For 2012

If you are one of the folks who would really like to utilize the Qualified Charitable Contribution (QCD) provision for 2012, especially if you are hoping to use the distribution to satisfy your RMD for the year, read on.  In the event that Congress should happen to act on this to extend the provision late in the year, you’ll want to delay your RMD as late as possible.  This means that you shouldn’t take any other distributions from your IRAs earlier in the year.

If you’re hoping to use the QCD but you don’t want to use it to satisfy your RMD for the year, you can take as many distributions as you like, but you’ll want to wait until late in the year (probably mid-December) before you make the planned charitable contribution.

The last time that Congress extended this provision, they did it on December 10th.  As long as you make your distribution by December 31, it will still count toward the current tax year, so if you’re hoping to use QCD you can delay to that date if necessary.  Practically speaking, if Congress hasn’t acted by Christmas Eve, a change won’t likely occur after that.

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Charitable Contributions From Your IRA – 2012 and Beyond

K S Hegde Charitable hospital
Image via Wikipedia

January 1, 2013 update: Passage of the American Taxpayer Relief Act of 2012 has extended the QCD through the end of 2013.  See this article for more details.

At the end of December, 2011, the provision for Qualified Charitable Distributions (QCD) expired.  That provision allowed the taxpayer age 70½ or older to make direct distributions from an IRA account to a qualified charity, bypassing recognition of the distribution as income.  For more information on the expired provision, see the original article about charitable distributions from your IRA.

With the expiration of this provision, you can still make charitable contributions of money distributed from your IRA.  The difference is that these contributions are no different from a contribution that you’ve made from your savings account or regular income.  In order to achieve a tax advantage from the contribution, you will itemize the charitable contribution on your tax return.  Of course, in addition to this, if the money is from your IRA you’ll also have to recognize the distribution as income.

Let’s look at both ways to fully understand what’s different now.

The old way

Under the expired provision if you qualified, you could make a direct distribution from your IRA account to the qualified charity of your choice.  Then when you were ready to file your tax return for the year, you wouldn’t include the amount of the direct distribution to the charity as income.  This could also include your Required Minimum Distribution (RMD) for the year, as well.

By doing this, you didn’t have to recognize this income at all – which doesn’t seem so important until you see how it works in the new way.

The new way

Now that the QCD provision has expired, you can still make charitable contributions from your IRA, but it’s not as advantageous as the old way.  Under this method (which can be enacted by anyone over age 59½ without penalty) you take a distribution from the IRA, and then send it to the charity of your choice.

(In actuality, the distribution doesn’t have to be from an IRA, but we’re doing a compare and contrast against the expired QCD arrangement, so that’s what we’ll use for the examples.)

When you get around to filing your tax return for the year now, you’ll have to recognize the distribution from your IRA as income.  Later on the return, you can include the charitable contribution as an itemized deduction, eventually lowering your taxable income by the same amount.  However, since you have to include the distribution as income, this will increase your overall income (unless you have Net Operating Losses from your business to offset the income), and will therefore also increase your Adjusted Gross Income (the bottom line of your Form 1040).  The significance to this is that many tax provisions depend upon the Adjusted Gross Income (AGI) figure.

An example is deductible medical expenses – these are only deductible to the extent that they are in excess of 7.5% of your AGI.  Miscellaneous Itemized expenses are subject to a similar “floor”: they must be greater than 2% of your AGI in order to be deductible.  In addition, certain phase-outs are impacted by AGI level as well.

So you can see that increasing your income can have a significant impact on your overall tax return.  Here’s a quick example of how this could impact a taxpayer.

Example

Taxpayer is single, age 73, and is subject to RMDs from his IRA.  He wishes to make a charitable contribution of $10,000 from his IRA funds to his church.  If this were 2011, he could make his distribution directly from the IRA to the church. Here’s how his tax return worked out:

Income (pension and IRA)

$50,000

Adjusted Gross Income

$50,000

Medical Expenses

$10,000

Deductible Medical Expenses (above 7.5% of AGI)

$6,250

Charitable Contributions (beyond the direct QCD)

$1,000

Exemption

$3,700

Taxable Income

$39,050

Tax

$5,888

Under the 2012 method, Taxpayer takes the distribution from his IRA and then sends it to his church.  Here’s how the tax return works out now:

Income (pension and IRA, plus his $10,000 additional distribution)

$60,000

Adjusted Gross Income

$60,000

Medical Expenses

$10,000

Deductible Medical Expenses (above 7.5% of AGI)

$5,500

Charitable Contributions (includes the additional $10,000 distribution)

$11,000

Exemption

$3,800

Taxable Income

$39,700

Tax

$5,955

Under the new method in our example, the tax cost was increased by $67.  This doesn’t seem like a lot, but if the circumstances were a bit different this could become sizeable – and who likes to pay extra taxes of any amount?

Bear in mind that this provision has expired and subsequently been extended in the past, so it’s possible that it could be extended again at some point in the future.  Stay tuned.

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