Charitable Donations Directed from IRAs Provide a Tax-Advantaged Giving Strategy

Charitable Donations Directed from IRAs Provide a Tax-Advantaged Giving Strategy

by Steve Gamer, Vice President, Advancement

(Click here to view the original article published in Financial Advisor Magazine.)

Ed Menashe’s life story practically requires a world atlas to follow. Born in Milan 85 years ago of an Italian mother and Syrian father, and raised in Peru, he was working for his family’s business in Egypt in 1958 when the government of Gamal Abdel Nasser confiscated their company.

He left for Canada, where he enrolled on a scholarship at McGill University. After graduating he moved to Los Angeles and built a successful business in industrial products, but he never forgot the warm welcome he received on the Montreal campus.

Recently, taking advantage of an underutilized provision in the tax code, he established an endowment fund at the Jewish Community Foundation of Los Angeles (The Foundation) and began making significant annual gifts to benefit his alma mater, earmarked for students who would otherwise be unable to afford to attend McGill. Mr. Menashe and other taxpayers who are 70½ years of age or older and have an Individual Retirement Account (IRA), can make very generous charitable gifts—up to $100,000—and exclude the donated amount from their taxable income.

Federal law requires retirement-age taxpayers to withdraw a specified minimum amount of money from their IRA accounts each year. Known as the required minimum distribution, or RMD, the amount withdrawn is normally treated as taxable income.

However, a special provision of the tax code allows those 70½ or older to make a charitable donation of all or part of their RMD (up to $100,000 annually). When they do so, that withdrawal becomes a qualified charitable distribution, or QCD.

Charitable contributions made via a QCD do not qualify for a tax deduction. Yet, individuals taking advantage of this provision pay no taxes on the funds they donate from their IRA; the amount of the donation is excluded from their taxable income.

Those in this age group can enjoy the tax benefit of making this charitable contribution—even if they take the standard deduction and don’t itemize.

This tax strategy is especially attractive following new rules introduced by the 2017 tax law. However, the ability to donate IRA withdrawals itself is not new.

It is imperative to follow the correct procedures in order to take advantage of the exclusion. Specifically:

  • You must arrange for some or all of your mandatory withdrawal to be made as a qualified charitable distribution, rather than as a standard RMD. To do so, you simply instruct the custodian of your IRA to write a check for the amount of the QCD, made out to a “public charity” as defined by the Internal Revenue Code. (A public charity in broad terms means a 501(c)(3) entity such as a house of worship, hospital, school, college, university, research center or other nonprofit that relies on broad public support.)
  • Your donation can be made by a check sent directly to the charity by your account custodian, or you can have the check made out to the charity and sent to you, so you can give it to the charity. The important point is that the check must be made out to the charity. If it is made out to you, it will be a taxable RMD, and will not be considered a QCD. That is the case even if you immediately endorse it over to the charity. Ideally, the charity should cash the check by December 31st, which means you should make the distribution by mid-December or earlier. You should ask the charity for a letter acknowledging your gift.
  • Be sure to inform your tax preparer that you made a QCD from your IRA. Otherwise, the preparer may see the 1099-R form provided by your IRA custodian and assume the funds withdrawn were a regular RMD, and thus are taxable income.

There are some additional restrictions to keep in mind. The election is irrevocable. Similarly, once an annual distribution for a tax year is received, the funds cannot be returned to your IRA account and subsequently taken out as a QCD.

Furthermore, QCD cannot be directed to a private foundation, donor-advised fund, charitable remainder trust, charitable lead trust, charitable gift annuity or similar giving vehicle. But, as Mr. Menashe did, it can be used to establish an endowment, which creates a perpetual flow of funds to a favorite charity or cause.

In addition, receiving any goods or services of value in return for your gift—such as tickets to a fundraising dinner or other event—is not permissible.

Remember that your QCD donation can go to a single charity, or to several. You can use up to the $100,000 annual cap. You cannot “roll over” a QCD; if you donate an amount above your required minimum distribution, the excess does not count toward next year’s RMD.