Charitable Giving from IRAs
There are many ways for donors to give to their favorite nonprofits. A donor may give an asset to a nonprofit as an outright gift during life. Some gifts, like charitable gift annuities, create a “split interest” and provide an income stream to the donor and the remainder to a nonprofit. Other types of gifts, like lifetime endowments, preserve the contributed principal and use the income generated to fund a dedicated program or purpose in perpetuity. All these gifts may be given by a donor to a nonprofit and may generate a tax deduction for the donor.
An IRA charitable rollover, also known as a qualified charitable distribution (QCD), is a unique type of gift that comes from a donor’s IRA during life and is transferred directly to a nonprofit. In the past, traditional IRAs did not have tax-favored results when used for charitable giving as they do now. Prior to Congressional approval of qualified charitable distributions from IRAs to qualified charitable organizations, donors had to withdraw the IRA funds, include the distribution as income and then claim a charitable income tax deduction for any portion given to charity. Sometimes the increased income from the withdrawal could trigger unwanted consequences, such as increasing a donor’s social security taxation or affecting a donor’s eligibility for Medicare.
Currently, a QCD can be made any time after an IRA owner reaches age 70½. The QCD is directly transferred to a qualified nonprofit and will not be included in the donor’s adjusted gross income. If the IRA owner must take required minimum distributions (RMDs), the QCD may be counted toward fulfilling the current year’s RMD. QCDs can be made in any amount up to $100,000 each year. If a married couple each has their own IRAs, then each can give up to $100,000 each year, for a total of $200,000.
After passage of the SECURE Act, most IRA owners will begin RMDs at age 72. RMDs are taxable distributions from a traditional IRA to the account owner. These distributions increase the account owner’s adjusted gross income and will be taxed as ordinary income. Some account owners who are required to take distributions may not need the extra income or want the taxation that comes along with the income. For these people, a qualified charitable distribution is an excellent opportunity to give to a nonprofit and bypass taxation. If the IRA owner has an RMD, the QCD will count toward the donor’s RMD. Please note, while a donor may not have an RMD until age 72, a QCD may be made any time after the IRA owner turns 70½. Any QCDs made before age 72 may not be used to “prepay” RMDs in future years.
A donor who makes a qualified charitable distribution will not be allowed to take a tax deduction for the gift. This is because the distribution is not included in the donor’s adjusted gross income. Therefore, the QCD is beneficial for those who itemize their taxes and those who do not itemize in the same way. One person can make a charitable gift of stock, for example, and deduct the amount of the gift on his income taxes. Another can take the standard income tax deduction ($12,550 for a single person in 2021) and not itemize deductions for gifts she made to nonprofits. Either could make a QCD and it would not affect their income taxes. For a donor who has reached the maximum deductible amount he or she can give, based on the adjusted gross income deduction limits, or a donor who simply wants to take the standard deduction on income taxes, the QCD is the perfect opportunity to give to nonprofits, while not increasing taxable income or needing to worry about itemizing.
Rules and Limitations
Someone who has inherited an IRA may make a qualified charitable distribution from that inherited account. However, the person who inherited must be 70½ years old to make the QCD. QCDs may not be made to supporting organizations, donor advised funds or private foundations, with the exception of conduit private foundations. Currently, a QCD cannot be used to fund a “split interest” gift such as a charitable gift annuity or charitable remainder trust. A QCD cannot be used for “quid pro quo” gifts. This means that the entire distribution to the nonprofit must qualify for a charitable deduction. For example, the donor may not make a QCD and then receive a dinner at a charitable gala or a table for friends and family at a charitable auction. A QCD may be used to fulfill a legally-binding pledge made by the donor. See Notice 2007-7. Finally, contributing to an IRA after age 70½ may reduce the tax favored treatment of the QCD. A donor’s deductible contributions to an IRA after age 70½ will be aggregated and the available tax-favored QCD amount will be reduced accordingly.
IRA custodians generally have distribution forms that may be delivered electronically or obtained in paper by contacting the custodian. It is the responsibility of the donor and the accepting nonprofit organization, rather than the IRA custodian, to ensure that the QCD is going to a qualifying organization. Donors who are unsure of a nonprofit’s status should check with the nonprofit to ensure it is a qualified public charity and not a supporting organization.
Crescendo offers GiftLegacy Pro website clients an IRA Charitable Rollover widget that may be added upon request. Donors can search for their IRA custodian in the widget. They can click a link to be redirected from your gift planning website directly to their account custodian’s webpages where they may be able to request to make a qualified charitable distribution to your organization. If the donor clicks “Notify us of Your IRA charitable rollover,” your organization will receive an email with the donor’s name and email address. This way you may connect with your donors to thank them for their gifts or see if they need any assistance.
Please contact Crescendo at 800-858-9154 if you would like to learn more about GiftLegacy Pro and ways to engage your donors through the web. We would like to hear from you!