Ask Al - Qualified Charitable Distributions

Al Fry, MSFS, MSM, CLU®, ChFC®, RHU®, REBC®

Al Fry, MSFS, MSM, CLU®, ChFC®, RHU®, REBC® A national planning specialist for Lincoln Financial Group for more than 30 years, Al currently has his own consulting practice. alfry@e-csi.com

What’s the big deal?
In the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 recently enacted, Qualified Charitable Distributions (QCDs), which expired December 31, 2009, were extended for 2010 and 2011. They are now set to expire on December 31, 2011 (unless extended again in 2012). Let’s briefly review the provisions: (a) the client (IRA Owner) must be at least 70½; (b) the distribution must be transferred directly from the client’s IRA to a qualified charity and is limited to $100,000; (c) the distribution will count toward the client’s Required Minimum Distribution (RMD); (d) the distribution will not be included in the client’s Adjusted Gross Income (AGI); and (e) the distribution can come from either regular IRAs or inherited IRAs. One problem is that the Act was passed so late in the year most everyone had already taken their RMD for 2010, even though the Act extended the 2010 QCD until January 31, 2011. I’d be surprised if many could take advantage of it for 2010, because an RMD taken earlier could not have been returned (rolled over) to the IRA. Of course, QCDs are not limited to the RMD, so a client may have found this to be a favorable way to make year-end gifts, even up to the end of January 2011.

Some may ask: “What’s the big deal? Can’t someone simply donate their RMD (and other amounts from their IRA) to a qualified charity and take an income tax deduction?” That may be true, but let’s explore reasons why the direct transfer under the QCD versus other donations may be advantageous, because it will not be included in one’s AGI.

• As many seniors do not currently itemize when they file their taxes, the QCD allows them to exclude paying taxes on the distribution.

• Lowering one’s AGI could have the effect of lowering the taxation of Social Security payments.

• Lowering one’s AGI could have the effect of lowering their Medicare Part B payments in the future.

• If the client’s IRA has cost basis, because QCDs come from nontaxed income first, the remaining IRA will have a greater percentage of taxfree income for future regular distributions.

• A QCD versus a direct donation could have a positive effect on the 30 percent or 50 percent of AGI limits on deductibility of this and other gifts to charity.

• For an individual still working, it may positively affect their ability to contribute to a Roth IRA.

• Could have a positive effect on other deductions and/or credits that are phased out by percentage of AGI limits.
 
Summary: There are many factors that would favor using QCDs to make gifts to qualified charities. Hopefully, Congress will see these advantages for their constituents and not wait until 2012 to extend it further, or better yet, make it permanent.

Correction: In our Fall 2010 column, there was carryover of a question from a prior column. Following is the correct question and answer.

My client’s IRA is payable to his wife who has her own IRA plus an inherited IRA from her sister. She will soon be over age 70½. When my client dies, will his wife be required to take three separate Required Minimum Distributions (RMDs)?

That all depends on various factors. The inherited IRA RMD must remain separate. For your client’s IRA, it depends on how she takes it. If she takes it as her own, she would have just one RMD, whether combined with hers or not. If she takes it as an inherited IRA (sometimes done when there is a wide age disparity), then it would have its own RMD (could not be combined with either of the others). Of course, any of your client’s RMD not yet taken in the year of his death should be taken in either case.


Al Fry, MSFS, MSM, CLU®, ChFC®, RHU®, REBC® A national planning specialist for Lincoln Financial Group for more than 30 years, Al currently has his own consulting practice. alfry@e-csi.com

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