The rules allowing „qualified charitable distribution“ (QCD) of an IRA were first established under section 1201 of the Pension Protection Act 2006. However, the biggest planning challenge for the instantly popular layout was that the original rule was only in effect for two years – 2006 and 2007 – after which the QCD rules expired. Example 3a. Jeremy has two IRAs. The first is the account to which he has been making ongoing contributions for years, and he currently has a total of $21,000, of which $15,000 is after-tax contributions (non-deductible). The second is a $158,000 rollover IRA from his previous 401(k) plan. If Jeremy were to take a $10,000 distribution from either of the two IRAs, then under the IRA aggregation rule, the total non-deductible contributions would be $15,000, the total IRAs would be $179,000 and the IRA distribution would be $15,000/$179,000 = 8.4% non-taxable and 91.6% taxable. However, if Jeremy makes an eligible charity distribution instead, the funds are assumed to come first from pre-tax dollars. Even though it makes the $10,000 QCD of the $21,000 IRA ($15,000 after-tax and $6,000 growth), the distribution is treated as complete before tax and questioned for QCD treatment because the IRA aggregation rule treats all IRA accounts as a single omnibus account, regardless of where the after-tax contributions were actually made. In addition, the charitable distribution of ERI must be a distribution that would otherwise have qualified for a full charitable deduction under IRC section 170 (even if the CDQs are not eligible for a deduction, as set out below).
This „must have been eligible for full deduction“ rule ensures that the IRA donor does not receive bribes or other „considerations“ for the donation (which would limit the donor`s deduction to the net amount and would not meet the QCD`s „full deduction“ requirement). This requirement also prevents a „charitable trust of common interest“ (e.g. a residual charitable fund or a primary charitable trust) from being an eligible beneficiary of the DCQ. Any traditional owner or beneficiary of the IRA who is at least 70 and a half years old can use the Qualified Charitable Distribution (QCD) rule to exempt their Minimum Required Distributions (MSY) from tax. The age limit here applies to the exact date the owner of the IRA reaches the age of 70 and a half. For example, if an IRA owner turns 70 on February 15, they won`t be able to do QCD until August. 15. Roth IRA owners are also allowed to apply the QCD rule, although they will not benefit from it as their distributions are already tax-exempt. Example 2: Chuck had an obligation of RMD 7,400 for the current financial year 2016.
In February, he took $7,400 to meet his entire MSY. In March, Chuck realized that it might have been better for him to do a QCD instead, as he planned to contribute to charities later that year anyway. But even if Chuck does a QCD now, it can`t be applied to his RMD (which was already filled), nor can it cancel his previous RMD (which is irrevocable once distributed). At best, Chuck can simply donate the $7,400 distribution he took from his IRA to a charity and claim a charitable deduction of $7,400 as a stand-alone deduction in Schedule A, hoping that this at least more than offsets his previous taxable distribution. To qualify for QCD treatment, the rules also state that the distribution must go to a public charity (as described in IRC Section 170(b)(1)(A)) and therefore cannot go to a private foundation, nor (as stated in tax law) a CDB may go to a sponsoring charity or donor-advised fund. The good news is that IRC Section 408(d)(8)(D) order rules specifically require that any eligible charitable distribution of an IRA first come from the taxable portion of the account (as opposed to the „typical“ prorated rule), which actually helps ensure the most favorable treatment. In addition, all IRA accounts are aggregated to determine the total tax base potentially eligible for an eligible (pre-tax) charitable distribution. In 2008, QCD rules were reinstated and extended until 2009 (under the Emergency Economic Stabilization Act of 2008, also known as the TARP Act, which came into effect during the financial crisis), only to expire again after 2009. QCDs, in turn, were reintroduced for 2010 and 2011 under the Tax Precipice legislation in late 2010, although they were reintroduced only 2 weeks before the end of the year, leaving little time for anyone to do a QCD (forcing Congress to grant taxpayers a one-month extension until January 2011 to do their QCDs in 2010!).
And unfortunately, this trend repeated itself again in 2012, when QCDs became obsolete for the entire year, then retroactively reintroduced to 2012 (and extended to 2013) with the second tax cliff legislation, prompting Congress to again provide a temporary extension for QCD 2012 until early 2013. Common giving strategies are also not available for QCDs, meaning that a couple cannot take the two aggregate MSY amounts from one account and exclude the total amount of their adjusted gross income (AGI). Each of them must debit their MSY from their own accounts for both to be eligible. However, in order to receive the tax benefits for performing a QCD of an IRA to a charity, very specific requirements must be met, including a minimum age limit, a limit on the maximum dollar amount, and only for certain types of eligible (public) charities (private foundations, such as donor-advised funds, and charitable foundations of common interest, not all of which are eligible). No, the additional 10% tax on advance distributions from eligible pension plans does not count as a penalty for withdrawing savings. The SECURE Act made significant changes to the rules of the DGR. For plan members and IRA holders who reach the age of 70 and a half in 2019, the previous rule applies and the first MSY must be completed with 1. April 2020. For plan members and IRA owners who turn 70 and a half in 2020, the first MSY must begin no later than April 1 of the year after the plan member or IRA owner turns 72. In the context of a Roth IRA, a QCD is usually a contentious point because a distribution of a Roth IRA is usually already exempt from tax (either as a return on capital or as a distribution qualified as tax-free growth), especially for someone who is already 70 and a half years old (and therefore who has probably had the Roth for more than 5 years than the required period of 5 years). To the extent that a distribution of a Roth IRA would in fact be an unqualified (i.e. taxable) distribution (e.g.
because it is a distribution of Roth IRA growth and the 5-year rule was not respected), it may be treated as QCD if made directly to a charity. If you regularly support charities, you may find that the QCD gift option offers you greater tax savings than cash donations. What for? Reducing your adjusted gross income (AGI) typically offers a greater tax benefit than claiming a tax deduction because the AGI is used in several calculations, such as determining the taxable portion of your Social Security benefits or the deductions and credits you can receive.