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How the Tax-Free IRA Distribution Donation Works

For the last few years, you’ve been allowed to make donations to IRS-approved charities directly out of your IRA if you were age 70½ or older at yearend. The annual limitation on these qualified charitable distributions, or QCDs, is a whopping $100,000. If your spouse has IRAs in his or her own name and is 70½ or older, he or she can also arrange for QCDs up to the $100,000 annual limit. Of course, smaller donations are allowed too (as small as you like).

The tax advantage is this: QCDs are federal-income-tax-free and they count as IRA required minimum distributions (RMDs). Since RMDs are taxable except when taken in the form of QCDs, you can substitute tax-free QCDs for taxable required distributions and thereby reduce your tax bill. In effect, this strategy allows you to deduct QCDs without any of the tax-law restrictions that apply to garden-variety charitable donations. (You don’t get to claim an actual charitable deduction, of course, because that would result in a double tax benefit.)

The QCD break expired at the end of 2009, but the new tax cut extension legislation retroactively restored it for 2010 and extended it through 2011, something discussed in yesterday’s Tax Guy column.

And you have more time than you might think to arrange QCDs for the 2010 tax year. The new law allows you to treat QCDs taken during January of 2011 as 2010 QCDs that also count as 2010 required minimum distributions (to the extent you’ve not already taken all you must for 2010). When you file your 2010 Form 1040, you’ll have to include a statement telling the IRS what you did.

Any other QCDs taken in 2011 will be treated as 2011 QCDs that also count as 2011 required minimum distributions, up to the required amount for 2011.

IRS Publication 590 at www.irs.gov explains the process further. One more thing:consult a tax pro before pulling the trigger on any large QCDs. If you don’t precisely follow all the applicable rules, you’ll trigger a tax bill instead of a tax break.

Readers, will you take advantage of this option?

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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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