Tax Break for IRA Distributions for a Charitable Donation
Original post by Michael Dreiser of Demand Media
In the United States, the Internal Revenue Code allows a tax-beneficial distribution from individual retirement accounts (IRAs) for certain charitable contributions. These tax-beneficial distributions are available only for contributions made from IRAs during 2010 and 2011.
Standard IRA Distributions
Typically, taxpayers aged 59 1/2 or older may take unlimited distributions from IRAs. These distributions may be used for any purpose, including living expenses, capital or business investments or even charitable contributions. Taxpayers, however, must include the amount of the distribution within their gross income when filing Form 1040 with the Internal Revenue Service (IRS). This amount is thus included within taxable income for the year in which the distribution occurred. This inclusion is necessary because a tax deduction was provided for the principal value at the time it was contributed. When a large distribution is made from an IRA, the tax due on the distribution may push the taxpayer into a higher income tax bracket and result in the levy of a significant federal income tax.
During 2010 and 2011, provisions of the Internal Revenue Code allow taxpayers aged 70 1/2 or older to exclude from gross income IRA distributions up to $100,000 that are considered qualified charitable distributions. A qualified charitable distribution is a distribution to an organization eligible to receive tax-deductible contributions for which the taxpayer retains the required charitable reporting documentation. These distributions must be paid directly from the IRA to the qualified charitable organization for the taxpayer to qualify for the tax break. Treatment of the distribution in this manner allows the taxpayer to avoid including the amount of the charitable distribution in taxable income when computing individual income tax.
Required Minimum Distributions
A second tax-beneficial provision of the Internal Revenue Code allows amounts considered qualified charitable distributions to satisfy the taxpayer’s required minimum distribution requirements for the tax year. Typically, taxpayers aged 70 1/2 or older must make minimum distributions from their IRAs on an annual basis. These distributions must then be reported as taxable income. However, during 2010 and 2011, taxpayers making a qualified charitable distribution are deemed to have satisfied the required minimum distribution rules for the year of the distribution.
Taxpayers making qualified charitable distributions from IRAs will receive a copy of IRS Form 1099-R, "Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc." that will report the amount of the qualified distribution. Taxpayers are then required to report the full amount of the qualified charitable distribution on IRS Form 1040 as an IRA distribution, but are to not include the amount, up to $100,000, in gross income. Instead, the taxpayer should notate "QCD" next to the amount of the distribution on the tax form.
- IRS.gov: Employee Plans News and Retirement News for Employers - January 12, 2011 - Qualified Charitable Distributions for 2010 and 2011
- IRS.gov: Publication 590, Individual Retirement Arrangements (IRAs)
About the Author
Michael Dreiser started writing professionally in 2010. He is a certified public accountant with experience working for a large New York City accountancy and expertise in areas ranging from private equity taxation to investment management. He holds a Master of Business Administration in international finance from l’École Nationale des Ponts et Chaussées in Paris.