The recently enacted Tax Increase Prevention Act extends the provision that allows certain IRA owners to make tax-free distributions to charity. However, there is a limited time to make the transfers, the IRS reminded taxpayers.
The extension applies for the 2014 tax year, which means that taxpayers have until Dec. 31, 2014, to complete their transactions. With the retroactive renewal of the provision, any eligible IRA distribution during 2014 properly transferred to a qualified charity counts as a qualified charitable distribution.
As a result, older IRA owners once again have a different way to give to charity. An IRA owner age 70-½ or older can directly transfer, tax-free, up to $100,000 per year to an eligible charity this option, first available in 2006, can be used for distribution from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRA plans and simplified employee pension plans are not eligible.
To qualify, funds must be transferred directly by the IRA trustee to the eligible charity. Distributed amounts may be excluded from the IRA owners income resulting in lower taxable income for the IRA owner. However, if the IRA owner excludes the distribution from income, no deduction, such as a charitable contribution deduction on Schedule A, may be taken for the distributed amount.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients. Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRAs required minimum distribution.
Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
QCDs are reported on Form 1040, Line 15. The full amount of the QCD is shown on Line 15a. The IRS said that these amounts should not be written on Line 15b, but that QCD should be written next to that line.
Roger Russell is a senior editor for Accounting Today.