Qualified Charitable Distributions Live On

February 2011Newsletters For Your Benefit

Based on a provision in the Pension Protection Act of 2006, an individual who is age 70-1/2 or older may make a tax-free donation of up to $100,000 directly from his or her individual retirement account to a qualified charity. Initially, this option was available only in 2006 and 2007, but it was extended through 2009 by provision in the Emergency Economic Stabilization Act of 2008. On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which contains a provision that extends the option for making qualified charitable distributions through 2011.

In order to qualify, the payment must be made directly by the IRA custodian to the charity. These disbursements are neither taxable nor deductible. However, qualified charitable distributions will satisfy required minimum distributions.

An IRA owner who has received his or her required minimum distribution may not recontribute that distribution to the IRA to have it be redistributed to the qualified charity. However, if an IRA owner has received a distribution in excess of the required minimum amount, the excess distribution may be rolled back into the same IRA or to another IRA within 60 days of the distribution and have the funds then be paid directly to the charity as a qualified charitable distribution.

The qualified charitable distribution option is available only for amounts accumulated in an individual retirement account. Distributions from employer-sponsored qualified retirement plans, savings incentive match plan for employees (SIMPLE) IRAs and simplified employee pension (SEP) plans are not eligible for this treatment. Moreover, not all charities are eligible recipients. Donor-advised funds and supporting organizations are ineligible, and any distributions made to these charities will be fully taxable to the IRA owner.

A qualified charitable distribution made by January 31, 2011, may be deemed to have been made in 2010 for purposes of satisfying 2010 required minimum distributions. The IRS web site confirms that in such a situation, the amount of the 2011 required minimum distribution is to be determined by subtracting from the individual’s December 31, 2010, IRA account balance, the full amount of the qualified charitable distribution made in January 2011.

The Congressional Research Service has suggested that qualified charitable distributions are most valuable to taxpayers who do not itemize their tax deductions and to taxpayers whose charitable contributions exceed 50 percent of gross income. According to the report, other taxpayers can achieve the same result by including the IRA distribution in gross income, donating the distribution to charity and, then, taking a tax deduction for the donation.

For more information regarding this topic, please contact Susan Foreman Jordan at 412.391.1334 or [email protected].