On December 19, Congress renewed Qualified Charitable Distributions (QCDs) once again for 2014. QCDs, which expired in 2013, allow IRA holders over 70.5 years of age to donate up to $100,000 of their Required Minimum Distributions (RMDs) to charities directly from their IRAs. These gifts are excluded from IRA holders’ taxable incomes, but count toward satisfying their RMDs.
Since QCDs were re-introduced less than two weeks before the December 31 RMD deadline, only those IRA holders who waited until the last minute were able to take advantage of QCDs to satisfy their 2014 mandatory withdrawals. Given the late rule change and ongoing uncertainty surrounding QCDs, this would be a good time to review a few charitable giving basics.
QCDs exclude the IRA distribution from gross income. For some donors, this can be more beneficial compared to taking the RMD, subsequently gifting it to charity, then claiming the gift as a tax deduction. Here is why:
Deductions may be reduced or even eliminated for high-income donors and some taxpayers don’t have enough deductions to itemize (they simply take the standard deduction).
• Medicare tax, the extra 3.8% those with high incomes pay on investment earnings, is based on gross income, not income after deductions.
• Medicare premiums are also based on gross income.
• Higher gross income can cause a greater percentage of Social Security benefits to become taxable.
In other words, two IRA holders with identical circumstances could end up with different results, if one used a QCD and the other used a charitable gift deduction.
Even if QCDs end up being extended again for 2015, IRA holders should weigh their options before acting. The most attractive way to give for many taxpayers remains donating appreciated securities. It produces a dual benefit: A tax deduction, as well as the elimination of a future tax on the capital gain. The gifted shares can be repurchased with cash from the RMD, restoring the donor’s investment portfolio and producing an even better tax result than the QCD option.
Supporting worthy causes can be a gratifying experience all by itself. By planning in advance with your investment and tax advisors, you can enjoy the added benefit of all available tax deductions.