How to Make a Tax-Free Donation From an IRA

Investors who have reached age 70½ can make charitable donations directly from their traditional individual retirement accounts (IRAs), saving taxes in the process.

But you need to act quickly, because this opportunity will expire at the end of 2011 unless Congress acts.

This donation option is called a qualified charitable distribution (QCD). Unlike most IRA distributions, which are taxable, the QCD is not.

However, a QCD must meet several tax-law requirements.

You must be 70½ and your IRA trustee must make QCDs directly to an eligible IRS-approved charity.

The QCD must meet normal tax-law requirements for a charitable donation that is 100% deductible, meaning if you receive any benefits that would be subtracted from a donation under the normal charitable deduction rules, you can make a QCD.

The QCD must be otherwise taxable, meaning a Roth IRA distribution generally does not meet this requirement.

Additionally, there’s a $100,000 limit on total QCDs per year.

However, if both you and your spouse have IRAs, you are entitled to $100,000 each, for a combined total of $200,000 – and that’s the case even if you file jointly.

Finally, note that you can’t claim itemized deductions for QCDs as you would for traditional donations to charities.

That’s because QCDs are already tax-free.

But there are a number of ways you save taxes using QCDs.

First, QCDs are not included in your adjusted gross income.

Second, QCDs fulfill required minimum distribution (RMD) rules – so you can take an RMD without paying taxes on it.

Third, QCDs reduce your taxable estate.