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Planning for the Possible Restoration of the Charitable IRA Rollover in 2014

Posted by Karen McCarthy on Jun 17, 2014 12:08:00 PM

Restoration-Charitable-IRA-RolloverQualified charitable distributions (“QCDs”) – sometimes referred to as charitable IRA rollovers - allow individuals age 70 1/2 and older to distribute up to $100,000 from a traditional or Roth IRA directly to most public charities (other than private foundations and donor-advised funds).

Created by the Pension Protection Act of 2006, QCDs were originally effective from August 17, 2006 through the end of 2007. Congress extended them through 2009 – and then extended them again through 2011. QCDs were expired for 2012, but in 2013, the American Taxpayer Relief Act of 2012 (ATRA), retroactively restored QCDs for 2012 and extended them through 2013. QCDs expired as of December 31, 2013, but is one of 55 provisions contained in an $85 billion tax extenders bill (HR 3474). HR 3474 was passed by the House on March 11, 2014, but currently is stalled in the Senate. On May 29, 2014, the House Ways and Means Committee approved an individual bill which would retroactively restore QCDs (to January 1, 2014) and, finally, would make them permanent for future years.

We sat down with Karen McCarthy and Natalie Takacs of Meaden & Moore’s Personal Tax Advisory Group to discuss QCD planning for 2014. Takacs begins by discussing the potential benefits of QCDs:

“Unlike traditional charitable contributions for which a donor is permitted to claim an itemized deduction, qualified charitable distributions are federal income tax-free to the donor. Since a QCD counts as a distribution for purposes of the minimum required distribution rules, taxpayers can arrange to simply donate amounts that they would otherwise be required to include in income under the MRD rules. This tax-free treatment makes QCDs a powerful tool in helping to lower a taxpayer’s adjusted gross income (“AGI”).

Managing AGI has always been important,” McCarthy comments, “because so many tax provisions are affected by it. For example, AGI can cause up to 85% of social security benefits to become taxable and can cause high income taxpayers to pay higher premiums for Medicare Parts B & D coverage. But managing AGI has become even more important since the net investment income tax went into effect in 2013. For example, the 3.8% medicare surtax on net investment income applies to AGI in excess of $250,000 for married taxpayers, regardless of taxable income. So, being able to exclude a $100,000 QCD from AGI might save a taxpayer $3,800 in net investment income tax as compared to claiming the traditional itemized deduction for charitable contributions.”

Takacs adds that QCDs can also mitigate the impact of the Pease limitation on itemized deductions. “Named for Donald Pease, the Ohio Congressman who helped create it, the Pease limitation was reintroduced in 2013.  The Pease limitation generally reduces itemized deductions (including charitable contributions) by 3% of the amount by which a taxpayer’s AGI exceeds $305,050 in 2014. (For single filers, the threshold amount is $254,200 in 2014.)  Making a charitable contribution using a QCD can not only avoid subjecting the contribution to the Pease limitation (that would otherwise apply to the contribution) but also can reduce the impact of the Pease limitation on other itemized deductions by up to $3,000.”

“And don’t forget state taxes,” McCarthy reminds. “For states that don’t allow itemized deductions for charitable contributions, QCD can also reduce state taxes. For example, in Ohio, a $100,000 QCD might save $5,000 in state taxes.”

Takacs recommends that clients who would like to take advantage of the benefits of QCDs in 2014 defer taking any distributions from their IRAs until congress decides on the QCD legislation. “For taxpayer’s age 70-1/2 or older, the tax law provides that the first dollars withdrawn from an IRA are deemed to be the RMD until that amount is satisfied. Since RMDs cannot be rolled over, absent the QCD provision, the first dollars withdrawn from an IRA during the year must be included in AGI. Although we hope that any QCD provision enacted by Congress would provide remedial relief for taxpayers who took IRA distributions in 2014 prior to the passage of the legislation, it’s always best to wait for the legislation to ensure that the QCD will comply with the requirements of the law."

When asked if she thinks Congress will reinstate QCDs for 2014, McCarthy responds, “I hope so, but it’s anyone’s guess at this point. Planning for a provision that doesn’t currently exist can be challenging, but we are working with our clients to ensure that if QCDs are reinstated, that our clients will be able to take advantage of it."

If you would like to discuss how QCDs or other strategies might help you manage the impact of the recent tax rate increases, please contact Karen McCarthy at 216-928-5414 or Natalie Takacs at 216-928-5403.

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Natalie Takacs is a Senior Manager is our Personal Tax Advisory Group. With over 20 years of experience working in the areas of individual, trust, and estate and gift tax, Natalie is skilled in managing the complex tax issues and transactions that her clients encounter when making financial and business decisions.  In her free time, Natalie enjoys traveling and spending time with her family.

Other posts by Karen & Natalie:
Tax Attorney Learns Important Lessons About IRA Rollovers - IRS to impose 1-year waiting period for IRA rollovers on an aggregate basis
Proposed Changes to Post-Death RMDs - President Obama and House Ways and Means Committee both propose 5-year post-death payout period for non-spousal beneficiaries of qualified retirement plans and IRAs
Required Minimum Distribution Tips & Traps (Part 1) - Common reasons why RMDs are missed

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Topics: Tax Planning & Strategies

Karen McCarthy

Karen McCarthy

Karen McCarthy, with 25+ years of tax planning experience, is a Vice President at Meaden & Moore and the Director of the Personal Tax Advisory Group.