Will Congress Extend IRA Donation Rule?
For the past several years, clients who are 70-1/2 years of age or older have been able to make charitable donations of up to $100,000 directly from their IRAs. These donations, known as qualified charitable distributions (QCDs), can serve as required minimum distributions, thus reducing the donor's reported income. [Source: financial-planning.com]
These QCDs allow non-itemizers to get a tax benefit from an otherwise non-deductible donation. High-income taxpayers who would lose their tax breaks to phaseouts may also get some tax relief, since the amount of the QCD is not included in their reported income.
"This provision is important for people who have charitable intent, and either don't itemize or have phaseouts based on adjusted gross income," says David Hultstrom, president and chief investment officer at Financial Architects, a financial planning and wealth management firm in Woodstock, Ga.
Yet making these sorts of donations before year-end has become unexpectedly tricky, because the QCD break has expired.
It's widely expected to be re-introduced before the end 2014 -- or even, retroactively, in 2015 -- but with renewal still uncertain, what should advisors suggest to interested clients now?
"If clients are going to make a charitable contribution anyway, they should do it out of their IRA, following the rules," says Hultstrom. That is, donations must go directly from the IRA to the charity.
Rob Siegmann, principal and chief operating officer at Financial Management Group in Cincinnati, agrees. "We encourage clients to gift from their IRAs, up to their RMD amount, even before we know if the charitable IRA provision will be extended," he says. "This allows clients to meet philanthropic goals while putting them in a position to benefit from the likely extension of the charitable IRA provision."
As Siegmann explains, clients who are eligible for charitable IRA gifting must take required minimum distributions before year-end. That distribution will be taxable to clients unless it is gifted to a qualified charity (assuming the QCD provision is extended).
2 POSSIBLE OUTCOMES
Clients face two possible outcomes if they make donations from their IRA now. If the QCD provision is extended, IRA money gifted to charity will be excluded from income. "This is the better result," says Siegmann.
If QCDs are not extended, then the IRA money gifted to charity is taxable as a normal IRA distribution. IRA owners will get an offsetting itemized tax deduction.
"Our firm expects Congress to extend the charitable provision," Siegmann says, "but it may not happen until too late for most people to utilize. The only way for clients to benefit from a late decision is to follow a strategy that assumes the extension."
Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.