Friday, July 23, 2010

Fate of QCD is in Congress' Hands

This week, the Ed Slott and Company IRA Discussion Forum featured a question on giving money to a charity from your IRA. For some IRA owners, there has actually been an “on again, off again, on again, off again” provision relating specifically to giving money to charities from their IRAs. What’s the deal right now? Read on to find out.

On August 17, 2006 the Pension Protection Act was signed into law by George W. Bush. Buried within the law was a provision allowing for a new type of IRA distribution, known as a qualified charitable distribution - or QCD for short.

The new provision allowed IRA owners (or IRA beneficiaries) over the age of 70 ½ to make distributions of up to $100,000 from their accounts directly to a qualifying charity. Instead of adding taxable income to their return and then claiming a corresponding deduction, they simply excluded the amount directly transferred to the qualifying charity from their taxable income. The direct transfer to the charity would also (help) satisfy any required minimum distributions. As a result, the new law benefited both charities and those who were already charitably inclined.

While the QCD provision was widely accepted as a positive change to the tax code, the Pension Protection Act only made the provision effective through December 31, 2007. That date came and went, but while Congress didn’t act quickly enough to prevent the provision from lapsing, on October 3, 2008, they passed The Emergency Economic Stabilization Bill - a.k.a. the bailout bill. It didn’t receive much press (which is understandable given the economic meltdown at the time), but once again, buried within the bill was the QCD provision.

Not only did Congress bring back the QCD provision via the “bailout bill”, but they made it retroactive back to the beginning of 2008. Too good to be true right? There’s gotta be a catch. And there was - for some reason, Congress once again failed to permanently enact the change, and instead, made it effective only through December 31, 2009. That date has also since passed and now, there is no QCD provision in effect.

Bringing back the QCD provision has been on Congress’ radar this year, but unfortunately they have yet to act on any legislation containing the extension. Is it likely to pass at some point? To be honest, lately it depends on what day of the week you ask. I’d like to say yes, but then again, who would have ever thought we’d have no estate tax this year.

There’s no guarantee that Congress will bring back QCDs, but if they do, who’s to say they will make it retroactive again (like they did last time) If you are considering donating a portion of your IRA money to a charity, you may want to consider waiting until later in 2010 to take your RMD - this way, if Congress does bring back the provision, you can kill two birds with one stone. Keep in mind though, that if you are planning on converting to a Roth IRA, you must first take your RMD.

Tax laws change all the time. Some are big, some are small - but no matter how big the change, you can only take advantage of those changes if you know about them. If IRAs are an important part of your financial picture, you should make sure to work with a knowledgeable advisor who stays up to date on the latest changes.

Got more questions?? Want to see what other people are asking? Check out the Ed Slott and Company IRA Discussion Forum.

By IRA Technical Consultant Jeffrey Levine and Jared Trexler
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