Charitable Giving: Year-End QCD Basics

If you have reached 70 ½ years of age, you can make cash donations to IRS-approved charities directly out of your traditional IRA. This is a tax-smart opportunity, but it will expire at the end of 2011 unless Congress acts.

Generally, distributions taken from your IRA are taxable. Specifically, your required minimum distribution (RMD) is taxed as ordinary income. However, qualified charitable distributions (QCDs) come out of your traditional IRA free of any federal income tax. While you do not get an itemized charitable deduction, the tax-free treatment of QCDs equate to a 100% deduction (because you will never be taxed on those amounts) without having to worry about restrictions that apply to itemized charitable write-offs.

A QCD must meet all of the following tax-law requirements:

• It must be distributed from an IRA and cannot occur before you, as the IRA owner or beneficiary, are at least 70 ½ years of age.

• It must be distributed directly by the IRA trustee to an eligible, IRS-approved charity.

• A distribution check issued by the trustee and made payable to an eligible charity meets the preceding requirement even if you handle the check on its way to the charity. However, when a distribution check is made out to you personally, it cannot be a QCD no matter how you handle it.

• It must meet the normal tax-law requirements for a 100% deductible charitable donation. Beware of this rule; if you receive any benefits that would be subtracted from a donation under the normal charitable deduction rules—such as tickets to an event—the distribution will not qualify.

Remember, this benefit will expire after December 31, 2011, so make sure to make the donation before year end.

If you have any questions about your own charitable giving plans, contact one of our Trust Administrators today.

This article originally appeared in the Winter 2011 edition of Market Letter, a Wintrust Wealth Management publication.