Qualified Charitable Distributions Extended

BERKELEY HEIGHTS, N.J. (TheStreet) -- Tax legislation passed in December extends qualified charitable distributions -- an IRA distribution paid directly to a charitable organization from IRAs -- through this year. QCDs are excluded from the taxpayer's gross income for federal tax purposes and count toward an individual's Required Minimum Distribution for the year. Since the IRA distribution is not reportable as income, though, the individual cannot claim a charitable deduction for the QCD.

So who does a QCD make sense for?

Qualified charitable distributions are a good vehicle for those making charitable donations, even by auction, above their adjusted gross income.

One example is a person or couple whose charitable contribution deductibility would be subject to the Adjusted Gross Income limitation rules. Typically the deductibility of charitable contributions is limited to 50% of someone's AGI. So taxpayers who want to make a large charitable donation above that are ideal candidates. Those 70.5 or older are allowed to make $100,000 in QCDs.

Another situation where a QCD would be appropriate is when a person wants to make a large charitable donation but their only funding mechanism is a large IRA balance. If the taxpayer took a large normal IRA distribution and made a donation from it, there could be unintended tax consequences, including increasing taxability of Social Security income, raising Medicare Part B Premiums and the reduction or loss of noncharitable itemized deductions subject to AGI limitations. Paying for the donation by QCD avoids creating additional taxable income and potential loss of deductions.

Taxpayers who simply want to contribute their RMD to a charity via a QCD are also good candidates. Worst-case, they are in the same position as if they took their RMD; this way, though, they are not creating incremental income taxable by their state. For federal tax purposes they have lowered their AGI, which may provide a few side benefits -- lower taxability of Social Security, or instance, or increasing other itemized deductions.

State taxes should also be considered before making a QCD. People limiting their QCD to their RMD do not need to worry, as it will have the same impact on their state taxes, but those going over should evaluate the implications. For example, New Jersey has not adopted the federal rules -- the QCD is 100% taxable as gross income in New Jersey. So someone making the maximum $100,000 QCD would be subject to the amount above the RMD to New Jersey income taxes. I am not saying this is a deal breaker, just that it needs to be considered in the overall picture.

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Michael Maye is the founder and president of MJM Financial Advisors, a registered investment advisory firm in Berkeley Heights, N.J. He is a member of the National Association of Personal Financial Advisors and has been a speaker covering tax topics at NAPFA's national and regional conferences. Maye has also been a frequent contributor to the Star Ledger of New Jersey's "Biz Brain" and "Get With the Plan" articles. In addition to NAPFA, he is a member of Financial Planning Association, American Institute of Certified Public Accountants, New Jersey State Society of CPAs and the Estate Planning Council of Northern New Jersey.

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