Thanks to the Protecting Americans From Tax Hikes Act of 2015 (“PATH”), signed into law on December 18, 2015, Section 408(d)(8) of the Internal Revenue Code once again provides a $100,000 annual exclusion from gross income each year for qualified charitable distributions (QCDs) made directly from a traditional IRA by donors aged 72 or older.
Furthermore, this IRA “charitable rollover” provision was made permanent (meaning it would take a vote of both Houses plus a presidential signature to change it), retroactive to January 1, 2015. This makes it much easier to plan for charitable rollover donations and make them without the year-end uncertainty that has plagued senior donors for the past several years.
As in past years, distributions from 401Ks, 403Bs, the TSPs of federal employees and military retirees, and other employer-sponsored retirement plans (such as SIMPLE IRAs and SEP plans) are not eligible. However, you usually can roll assets from those plans into IRAs and then donate them if you begin the process early enough in the year.
To qualify, the funds must be transferred directly by your IRA trustee to an eligible charity. Not all charities are eligible. For example, donor-advised funds (such as those offered by Fidelity Charitable and Vanguard Charitable) and supporting organizations are not eligible recipients.
And, as in the past, distributed amounts don’t qualify for deductions (since they were never taxed in the first place). Instead, they may be excluded from your income — giving you a smaller Adjusted Gross Income on your Form 1040.
Under a special and favorable IRS rule under the charitable rollover provisions, distributions from an IRA to charity are deemed to come first from the taxable portion of the IRA account, and then from any non-taxable portion. This is a distinct benefit to taxpayers who made non-deductible IRA contributions during their working years.
You May Not Receive Anything Of Value In Return
This rule can be harsh, so be careful. Any quid pro quo benefit or thing of value received by the donor in return for the charitable rollover distribution – even the value of a dinner, a sports ticket, or other seemingly trivial benefit, may disqualify the entire distribution, not just a portion equal to the benefit received, from QCD treatment.
Therefore, a careful donor will first advise the charity well in advance that: (1) a distribution will be made from an IRA account to the charity and that it is intended to constitute a qualified charitable distribution under IRC § 408(d); and (2) that no goods, services, or benefits of any kind are to be provided by the charity to the donor or any other person in consideration for the distribution. (Charities usually know this well, but it never hurts to remind them.) In addition, a wise donor will request in advance that the charity provide a letter to the donor acknowledging the amount of the distribution that it received and confirming that no goods, services, or benefits of any kind were or will be provided to the donor or any other party in exchange for the distribution. If you don’t receive such a letter within days of making a QCD, you should remind the charity that you need one.
[Updated: December 16, 2021]