It’s been a rough several years for charities and retirees, and the government hasn’t exactly made it any easier. For years the Fed has pushed and held interest rates low, rewarding borrowers and punishing savers fearful of getting their nest eggs thwacked in the market. And while the struggling economy has forced many non-profit charities to scale back the pursuit of their missions for lack of confident donors, Congress withheld a tiny provision in the tax code designed to connect charitably inclined retirees with causes in need of funding—until ATRA, the American Tax Relief Act of 2013.
One of the more overlooked provisions of the so-called Fiscal Cliff deal that arrived just in time for the market open January 2, 2013 is the renewed allowance of Qualified Charitable Distributions (QCDs) from Individual Retirement Accounts (IRAs). But while weighed down by illusive acronyms and volumes of seemingly more prominent provisions in the updated tax code, this news is grounds for rejoicing for the charitably minded and non-profits alike.
Qualified Charitable Distributions allow donors over age 70 ½ to make direct distributions from their “Traditional” IRAs—free from the burden of taxation—to qualified charities of their choosing, up to a total of $100,000. Those seasoned enough to have celebrated that quirky half birthday know that in all subsequent years, the IRS requires distributions from those retirement accounts which have received years of tax deferral, known as RMDs, or Required Minimum Distributions. In most cases, these forced RMDs are 100% taxable as ordinary income.
For those blessed with sufficient income from pensions, Social Security and other sources, these distributions can become a taxable nuisance. But in years in which QCDs are allowed, you may give the entirety of your RMD—and beyond, up to $100,000—directly to a charity and excluded from taxable income. For the appropriately positioned donor, the net result may be a gratifying gift that reduces taxes.
Furthermore, if you are considering which assets you would prefer to bequeath to your heirs and to charity, in life and death, Traditional IRA assets become an especially attractive target for charitable giving. Here’s why: You and even your heirs pay taxes on distributions from your retirement accounts that were funded with tax-deductible contributions—qualified charitable organizations don’t.
That’s the good news. The bad news is that Qualified Charitable Deductions are not a permanent allowance in our tax code. They were available in 2011 and some prior years, but election year partisan rancor put QCDs on the back burner in 2012. Congress is trying to make up for that by making QCDs available in 2013, and even retroactively for 2012 if an RMD was taken in December and/or if the gift is made prior to January 31, 2013. But it is my hope and prayer that Congress gets off its self-centric butt and makes Qualified Charitable Deductions a permanent part of our tax code. (Can you hear the crickets chirping?) This would allow the charitably inclined and qualified charitable organizations to make predictable plans to pursue their worthy missions, tax free.