QUALIFIED CHARITABLE DISTRIBUTIONS IN 2015 UNCERTAIN, BUT THERE IS AN OPTION!
Billy Thomas, CPA
Capitol Hill provided an excellent holiday gift in late-December 2014 with the Tax Extenders Package, otherwise known as The Tax Increase Prevention Act. One of the most talked about provisions of the Act was the extension of tax-free distributions from an Individual Retirement Account (IRA) for charitable purposes through December 31, 2014. This is called a Qualified Charitable Distribution (QCD) in tax terms.
A QCD is a very common tax savings strategy. Essentially, a taxpayer who is 70 ½ is subject to required minimum distribution rules and must take at least a specific and calculated distribution from their IRA each year. A QCD allows a taxpayer to satisfy the required distribution rules if they elect to donate their distribution, up to $100,000 per taxpayer, directly to a qualified charity. The benefit to the taxpayer is the amount donated to charity through the IRA distribution is not included in his or her gross income. Generally, amounts that can be excluded from gross income rather than as an itemized tax deduction on Schedule A result in a better tax benefit to the taxpayer, especially given the current environment of the Pease limitations on itemized deductions. For QCDs purposes qualified charities do not include community foundations, private foundations or other donor-advised funds.
Sure, this is great news for tax year 2014. However, what happens in tax year 2015? The one-year extender provisions approved by Congress have been consistent holiday gifts for many of the recent tax years. Will you have to wait until the end of the year again to see if Congress extends this provision and scramble to make your Qualified Charitable Distribution?
Well, there is an approach that proactive taxpayers can employ while waiting to see if Congress will again extend the provision.
A taxpayer can work with their financial advisor to follow the QCD rules and make a distribution directly to charity. In other words, make your donation today on the presumption the QCD benefit for taxpayers will be retroactively extended through December 31, 2015. If Congress does extend the tax provision one more year, you will have already acted in advance preventing the last minute rush at year-end. You will receive the benefit of a QCD and effectively exclude the distribution from your gross income.
However, what happens if Congress allows this provision to lapse without an extension through 2015? All is not lost. If the QCD tax rule is not extended, you will report the distribution in your gross income, but you will then receive an itemized deduction for your charitable donation to the qualified charity. This is not quite as good as the QCD benefit, however, it still provides you with some tax savings.
Regardless of whether you find this option suitable, it is always best practice to seek advice from your tax and financial advisors periodically throughout the year.