For most people, using IRA dollars for charity is a two-step process. You take money from your

IRA, reporting taxable income. Then, you donate it to the charity or charities of your choice,

perhaps claiming a tax deduction for the contribution.

 

The new PATH law establishes the permanence of qualified charitable distributions

(QCDs), which go directly from IRAs to recipient organizations. They’re available only to IRA

owners age 70½ or older. Such individuals can use QCDs every year now, up to $100,000 per

year.

 

Once IRA owners reach age 70½, they usually must take certain amounts of required

minimum distributions (RMDs) each year or pay a 50% penalty on any shortfall. QCDs count

toward RMDs.

 

Example: Joyce Harris, age 72, has a 2016 RMD of $20,000. If Joyce, who gives $5,000

to charities each year, makes those donations directly from her IRA, that $5,000 counts toward

her RMD for the year, so she’ll only have to withdraw another $15,000 from her IRA in 2016.

She’ll report only $15,000 of taxable income, not $20,000, but she won’t get a tax deduction for

the $5,000 flowing from her IRA to charities.

 

Why would Joyce do this? There are several situations in which using a QCD could pay

off. Perhaps most important, Joyce will be able to satisfy her $20,000 RMD obligation yet only

report $15,000 of income, thus, reducing what otherwise would be her adjusted gross income

(AGI) by $5,000. For some taxpayers, QCDs can eliminate any addition to AGI from their

required IRA distributions. A lower AGI, in turn, can offer many benefits throughout your tax

return. Our office can go over your specific situation to see if using an IRA for donations after

age 70½ would be tax-effective for you.