Tax Law Changes Enhance Charitable Giving with IRAs

By Robert Cabanski Principal of the Trust Company

Since 2006, older Americans were given the opportunity to shelter otherwise taxable IRA distributions by making charitable gifts directly from their IRAs. Those who are age 70½ or older can make charitable gifts of up to $100,000 each year from their IRAs and exclude that otherwise taxable IRA distribution from their taxable income with the use of qualified charitable distributions (QCDs). QCDs can be used to satisfy, or reduce, your annual IRA required minimum distribution (RMD) amount for the year, but the distribution will not qualify for the charitable income tax deduction. QCDs can also be made directly from inherited IRAs under the same set of rules.

The tax benefits from QCD giving can be significant as opposed to using other funds to fulfill charitable intentions. For example, Ohio taxpayers receive no direct tax deductions for charitable gifts and with increased standard deduction amounts, a significant number of taxpayers no longer benefit from itemized deductions on their federal tax return. This includes deductions for charitable contributions. The exclusion of these IRS distributions from the taxpayer’s adjusted gross income can create other indirect tax benefits as certain tax limitations and taxability are based upon a taxpayer’s adjusted gross income.

To qualify for a QCD exclusion, the charitable gift must be made directly from your IRA and it must be made to a qualified charity, which does not include private foundations or donor advised funds. However, QCD contributions can be made to The Findlay-Hancock County Community Foundation to Funds for the Common Good, Field of Interest Fund, a Designated Fund for a nonprofit organization, or a Scholarship Fund. Contact Foundation Donor Engagement Staff for other qualifying charity options.

In December 2022, Congress enacted the Setting Every Community Up for Retirement Enhancement Act (Secure Act 2.0). The Secure Act 2.0 brought welcome enhancements to the provisions relating to QCDs. First, the annual $100,000 cap on QCDs will be indexed each year for inflation beginning in 2024. Most importantly, the new Act gives each taxpayer who is 70 ½ and older a one-time election to transfer a QCD of up to $50,000 from an IRA to a split interest entity. Such split interest entities can include a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity and can pay a fixed percentage (minimum of 5%) for the life of the IRA owner and/ or their spouse. The IRA distribution is excluded from the IRA owner’s taxable income and allows the owner to satisfy his or her RMD for the year of the transfer. However, distributions to the owner or the owner’s spouse from the split-interest entity is taxable as ordinary income. The new Act also indexes this one-time $50,000 election cap for inflation for years after 2023.

If you are 70½ with significant retirement assets in an IRA or Inherited IRA with philanthropic intentions, contact your financial or tax advisor to discuss the potential benefits to you by utilizing QCDs.