The Protecting Americans from Tax Hikes Act (“Path Act”), which was enacted into law on December 18, 2015, made permanent the tax provision that allows individuals age 70½ and older to distribute up to $100,000 in a given taxable year from their individual retirement accounts (“IRA”) to charities and have the amount so distributed excluded from gross income.  This provision applies only to qualified charitable distributions (“QCD”), which are defined as any distributions out of an IRA directly to a public charity or a donor advised fund. QCDs do not include distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pensions (“SEPs”).  QCDs do satisfy required minimum distribution requirements for the year in which the QCD is made.

The permanent enactment of this provision is important because it allows for planning to be done with certainty.  In previous years, this provision was enacted on a year by year basis and many times not until late in the year.  This created a planning problem for those who wanted to make a QCD during the year, but had to do so at some risk unless and until the provision was enacted later in the year.

Importantly, QCDs offer advantages over taking a taxable distribution from an IRA and then contributing the proceeds from that distribution to a public charity or donor advised fund.  That’s because IRA distributions are included in adjusted gross income which can result in:

• An increase in the amount of Social Security benefits being taxed;
• Itemized deductions being reduced;
• Limiting the amount of charitable deductions for current year;
• An increase in Medicare insurance premiums; or,
• Triggering the net investment income tax.

QCDs avoid these potential pitfalls.  Not to mention that some retirees get no tax benefit from their charitable gifts because, without home mortgage interest, they do not have enough deductions to itemize.  Using this strategy, those same individuals can take the standard deduction, plus they get to exclude some or all of their IRA distribution from income.

To qualify as a QCD, the distribution must be made directly from the IRA custodian to the charity.  The distribution won’t qualify if the IRA custodian transfers money first to the IRA owner and then the IRA owner writes a check to the charity for the amount of the distribution.

All in all, this is a good change to the tax law and makes it easier and more economical for those over the age of 70 ½ who are charitable inclined to make charitable gifts.