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Will it be possible in 2014 to take an IRA distribution and put it directly into a charitable trust, tax free?

Carol W ., WA

Hi Carol,

We are almost halfway through 2014 and the IRS has still not offered any guidance on the status of qualified charitable distributions (“QCDs”). QCDs, known as charitable IRA rollovers, are a way of moving your IRA money tax-free to a charity.

Enacted in 2006 on a two-year basis and extended several times, the distribution benefited individuals 70-1/2 years and older who give to charity directly from an IRA. They could give up to $100,000, exclude the gift from their taxable income, and count the gift toward the annual IRA withdrawals they are required to make.

In general, the charitable IRA provision benefited a lot of taxpayers more than they would have saved by taking money from an IRA, paying income taxes on it and writing a check to charity. However, if one were under the age of 70 and wished to use IRA funds to make a charitable contribution, the individual would first have to take an IRA distribution and then make a charitable contribution. In other words, the individual would have to take the distribution into income and then would receive a charitable deduction for the amount of the contribution.

Take the example of a $20,000 gift. Someone who doesn't itemize deductions normally would receive no tax break for the gift. But the qualified charitable distribution would allow the taxpayer to exclude the $20,000 from income. Assuming one is in the 25% tax bracket that would save $5,000.

In order to avail oneself of taking a QCD, the following must occur:

1. The IRA owner must be age 70 ½ or older.

2. The donor must directly transfer the money tax-free to an eligible organization.

3. The maximum amount that an IRA owner may transfer annually tax-free is $100,000 to an eligible organization.

4. Amounts transferred are not taxable and no deduction is available for the amount given to the charity unless non-deductable contributions are transferred.

5. Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.  If non-deductible contributions are transferred to an eligible organization, a charitable contribution deduction may be allowed if itemizing deductions.

For more information on this subject, please contact a retirement tax expert at 800-472-0646.

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