Deductions for charitable investment gifts

Karin Price Mueller/The Star-Ledger writes: Q. Recently, you wrote about the option for people who are required to take a mandatory distribution from an IRA to direct the withdrawal to a not-for-profit 501(c)3 in order to avoid paying income tax. I believe you also said the donor could take a deduction for the gift. Others have told me you cannot take the deduction if the income is not earned. Which is it?

A. The tax code can be confusing and complicated, so the Brain is glad you asked.

Melody is referring to what’s known as a qualified charitable distribution, or QCD.

"The good news is that the American Taxpayer Relief Act of 2012 (ATRA) extended the qualified charitable distribution (QCD) through 2013," said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Berkeley Heights. "A QCD is when an IRA owner over the age of 70.5 years directs an otherwise taxable IRA distribution directly to a qualified charity."

The maximum amount allowed to be excluded from gross income from a QCD per year is $100,000, and it can be used to satisfy any IRA required minimum distributions, or RMDs, Maye said.

Qualified charitable distributions are payments of otherwise taxable amounts by an IRA trustee directly to a qualified public charity, or so-called "50 percent charities," and transfers to private foundations and donor advised funds are not allowed, said Gail Rosen, a Martinsville-based certified public accountant.

She said the rule cannot be used for distributions from SEP accounts, SIMPLE accounts, or qualified retirement plan accounts.

So what can and cannot be deducted in this case?

For tax purposes, the IRA distribution on a QCD is excluded from the donor’s income, May said. Likewise, the QCD is not allowed to claim a charitable deduction on Schedule A as an itemized deduction.

"This make sense from a tax perspective because an individual who makes a QCD has already received a tax benefit by not having to report an IRA RMD as income," Maye said. "In essence, someone who has made a QCD has already gotten a tax benefit from doing so."

Rosen said the fact that qualified charitable distributions are not included in the donor’s adjusted gross income (AGI) lowers the odds that he or she will be affected by various other unfavorable AGI-based tax provisions. Among them are a reduction of the threshold for deducting medical expenses, reducing taxes on the donor’s Social Security benefits, and reducing the threshold AGI so can qualify for phase-out of the $25,000 rental real estate exception to the passive loss rules and other income related tax deductions and income limits that rely on total AGI as a guideline.