Making A Qualified Charitable Distribution in 2010

Many of you who took advantage of the Qualified Charitable Distribution (QCD) in 2009 were hoping that you could do this again for tax year 2010 – and if you waited, you were in luck.  With the passage of the 2010 Tax Act in mid-December, the QCD was made retroactively available in 2010 (and 2011) for any IRA owner who is at least age 70½ years of age and therefore subject to the Required Minimum Distribution (RMD) rules.

The QCD provision allows an IRA owner as described to direct a distribution from his IRA to a qualified charitable organization – and this distribution does not impact the IRA owner’s Adjusted Gross Income.  In addition, the distribution can be used to satisfy the IRA owner’s RMD for the year, tax free.


The Problem

The problem that many IRA owners are facing is that the Tax Act was passed so late in the year.  Many IRA owners figured there was no way that this provision could be passed in time to be able to take advantage of it during 2010.  As it turns out, the late passage of the law actually included an extension of the time that an IRA owner had in order to complete the transaction – until the end of January, 2011.

Unfortunately, many IRA owners assumed the worst, and knew that they must complete their minimum distributions before the end of 2010 – so at some point before the law was passed they went ahead and took the RMD.  I call this unfortunate because, having taken the RMD from the account, the IRA owner could no longer utilize the QCD (when it became available again) to satisfy the year’s RMD.

Quite a few people have had this situation to face, often causing them to recognize extra, unplanned income on their income tax returns for 2010.  Even if you sent the money back to the IRA custodian, it was too late.  This is because the IRS considers the first money that you withdraw from your IRA as your RMD for the year – and RMDs are not eligible for rollover (which is what you’d be doing if you sent it back).

You could still have directed a QCD to a charity directly from your IRA and have it treated as tax-free (not included in your AGI, since the Tax Act passed), but you still would have to include your previously-received RMD as income for the year.

A Solution (but it’s too late now)

One way that you could have dealt with this would have been to send a QCD earlier in the year to your charity of choice – and then wait until Congress decided to act.  The risk that you would take in that case is if Congress had not acted, you would still have to include the QCD as income, which could have negative impact on your tax return in general (increasing your AGI, increasing your taxable Social Security benefits, and reducing some deductions, among other things).  But you could still enter the QCD amount as a charitable contribution on your itemized deductions on Schedule A.

As it turns out, taking such an action would have worked in your favor, as the QCD provision was reinstated retroactively for 2010.  But then again, hindsight is perfect, as usual.  

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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