Required Minimum Distributions, Charitable Donations, and the PATH Act of 2015

 

The Protecting Americans from Tax Hikes (PATH) Act of 2015 makes permanent the exclusion from gross income for qualified charitable distributions of up to $100,000 received from traditional or Roth IRAs ($100,000 for each spouse on a joint return). A qualified charitable distribution is a distribution from the IRA made directly by the IRA trustee to a charitable organization on or after the date the taxpayer has attained age 70 ½. The amount of the distribution is limited to the amount of the distribution that would otherwise be included in gross income.

Taxpayers who receive taxable distributions but also contribute to charitable organizations may benefit. You can reduce your taxable income by excluding up to $100,000 of your IRA distribution from gross income when you transfer it directly to a charitable organization. This exclusion counts toward satisfying your minimum required distributions from a traditional IRA, but is also available for taxable Roth IRA distributions.

If your IRA includes nondeductible contributions, the qualified charitable distribution is first considered to be paid out of otherwise taxable income. A special ordering rule applies to separate taxable distributions from nontaxable IRA distributions for charitable distribution purposes. Under this rule, a distribution is treated first as income up to the aggregate amount that would otherwise be includible in the owner’s gross income if all amounts in all the owner’s IRAs were distributed during the tax year, and all such plans were treated as one contract for purposes of determining the aggregate amount includible as gross income.

Qualified charitable distributions are not taken into account for purposes of determining the IRA owner’s charitable deduction. The entire distribution, however, must otherwise be allowable as a charitable deduction (disregarding the percentage limitations) to be excluded from gross income. Therefore if the contribution would be reduced for any reason (e.g., a benefit received in exchange or substantiation problems), the exclusion is not available for any part of the qualified charitable distribution.

In order to qualify, you need the same kind of acknowledgment from the charitable institution that would be needed to claim any other charitable deduction.

Although a charitable contribution may be motivated by humanitarian reasons rather than by tax considerations, it is, nevertheless, wise to take tax considerations into account when making a contribution. Since this distribution must be made by the IRA trustee directly to a qualified charitable organization, you should review your charitable tax giving as soon as possible. Please call our office at your earliest convenience to discuss this option.