IRA distributions to charity: so what?

by Paul Meloan

In the most recent iteration of what passes for tax policy from Congress, the law allowing people to make direct transfers to charity from their individual retirement accounts (IRAs) was extended.  Since both my dad and my in-laws asked me pretty much the exact same questions about it, I figured a few more people may want to know about it. 

This is one of the finest example I have ever seen of chicken soup for a financial cold: it probably won’t help you very much, but it can’t hurt.

Who cares?  You do, if you or someone in your family is at least 70 1/2 years old, and is taking required minimum distributions (RMDs) from their IRA.  Watch out, more abbreviations coming.

How do you do it?  You contact the custodian of your IRA (generally, that’s the brokerage where you have the account) and tell them you want to do a Qualified Charitable Distribution (QCD, another abbreviation for you).  You tell them who the charity is you want to benefit, and rather than send you the money as they would in a normal distribution, they send the money directly to the charity.  You don’t handle the money.  This will count against your RMD (which is a good thing).

At year’s end, you get a 1099-R from the custodian, just like normal.  But when you do your tax return, you enter the taxable amount of the distribution that went to charity as “zero.”  The money is NOT counted as income on your return.  Likewise, do NOT put a deduction on Schedule A for the money that went to the charity.  You only get one bite at the apple.

The rule is a nice thing if you want to give money to charity, but it is not much of a boon to the middle-income retirees at which it was aimed.  How might it help?  A lower adjusted gross income (AGI) might help you in a few ways:

1.  You have big deductions that are a function of AGI, like medical expenses, and miscellaneous itemized deductions.
2.  You may bump into higher medicare premiums based on your AGI.  Check this out to see if you are at risk for that.
3.  You want to give a lot of money to charity, this may help you get to deduct it sooner.  Generally, charitable contributions can only be deducted up to 50% of AGI, with the balance carried forward.  This takes the charitable gift and essentially exempts it from that rule.
4.  The most you can give this way is $100,000 per person, per year.

Here is an only slightly-stale summary from the IRS itself.

For more rules than you would ever want to read, go to the horse’s mouth, which is Publication 590 (Individual Retirement Arrangements) from the IRS.

Last thing, it all expires at the end of this year anyway.  Good luck in 2012!