Section 401(a)(9) requires annual minimum distributions from traditional IRAs beginning in the year the owner of the account attains age 72 or, if later, the year in which the person retires. These minimum distributions trigger income taxes at ordinary income rates where otherwise the recipient may wish not to receive distributions. Fortunately, for those who are charitably minded, the Code provides a mechanism whereby retired individuals can support charities of their choice and also minimize the income taxes caused by required minimum distributions.

Section 408(d)(1) provides in general any amount distributed from an IRA (including by reason of a required minimum distribution) is included in the gross income of the recipient. However, Section 408(d)(8)(A) provides an exception for qualified charitable distributions up to $100,000 per year. Section 408(d)(8)(B) defines “qualified charitable distribution” as any distribution from a retirement plan (other than a plan described in subsection (k) or (p)) that is made directly by the trustee to an organization described in Section 170(b)(1)(A) (i.e., a charitable organization) other than any organization described in section 509(a)(3) or a fund or account described in Section 4966(d)(2) and made on or after the date the individual for whose benefit the plan is maintained has attained age 70½.

Section 408(d)(8)(E) provides qualified charitable distributions that are excluded from income pursuant to Section 408(d)(8)(A) are not taken into account in determining the deduction under Section 170 for charitable contributions. That makes sense because by allowing the pre-tax dollars that were contributed to the IRA to be distributed directly to the charity tax-free, the retiree avoids all income tax associated with those dollars (and their growth while in the account) while simultaneously supporting his or her charity of choice. Avoiding 100% of the tax is far better than a charitable deduction under Section 170. Section 408(d)(8)(E) merely prevents a taxpayer from double dipping by obtaining a charitable deduction on top of the tax exemption of the distribution. Moreover, the charity, as a tax-exempt organization, is not taxed on the distribution.

John G. Hodnette is an attorney with Johnston, Allison & Hord in Charlotte.

January 18, 2023/by TAX