Tax Extenders bill makes qualified charitable distributions permanent
Congress has passed legislation that retroactively extends qualified charitable distributions (QCDs) from Traditional and Roth IRAs to January 1, 2015, and makes the provision permanent going forward.
The provision—which allows IRA owners and beneficiaries age 70½ and older to donate up to $100,000 per year tax-free to eligible charitable organizations—was included in a package of tax extenders that will cost $622 billion over the next 10 years. The previous one-year extension of the provision had sunset on December 31, 2014, and QCDs were no longer permitted under the tax laws.
A QCD is a taxable distribution of Traditional or Roth IRA assets paid directly to a qualified charity. An IRA distribution qualifies if it is made after the IRA owner reaches age 70½ and the IRA owner could have deducted the contribution if it were made directly to the charity.
A QCD can be used to satisfy the IRA owner’s required minimum distribution for the year, and an IRA beneficiary who has attained age 70½ can also make a QCD of the inherited IRA assets.
QCD Provision Sunset on December 31, 2014
QCDs were created by the Pension Protection Act of 2006 and were effective for tax years 2006 and 2007. This temporary provision was extended through 2009 by the Tax Extenders and Alternative Minimum Tax Relief Act of 2008. The provision then expired at the end of 2009 when the Senate failed to act on a House bill to extend the provision. There were several attempts in 2010 to extend QCDs, but it was not until nearly a year later that President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which provided for a two-year extension of QCDs, from December 31, 2009, through December 31, 2011. The popular tax break then expired at the end of 2011 when Congress failed to act on bills in both the House and Senate to extend the provision.
The provision was not extended until January 2013, when President Obama signed into law the American Taxpayer Relief Act of 2012, which made permanent the Bush-era tax rates and extended QCDs for two-years, from December 31, 2011, through December 31, 2013. The provision then again expired at the end of 2013, when the House and Senate adjourned after passing a two-year budget deal to avoid another government shutdown, but failed to act on legislation to extend QCDs.
Then, in the waning hours of the 2014 lame-duck session, the House and Senate passed the Tax Increase Prevention Act of 2014 (TIPRA). This legislation retroactively extend a host of temporary tax provisions that expired at the end of 2013—including QCDs from Traditional and Roth IRAs—after efforts to make the provision permanent failed. The one year extension, from December 31, 2013, through December 31, 2014, meant that the provision sunset shortly after passage, and QCDs were no longer permitted after December 31, 2014.
H.R. 2029 Makes QCD Provision Permanent
QCDs have been very popular since first being introduced and enjoyed bipartisan and bicameral support in Congress, but that did not make it any easier to make the provision permanent. QCDs were lumped together with other popular tax credits—including the research and development tax credit—and were extended on numerous occasions, often retroactively after the provisions had expired. This created uncertainty for taxpayers and a desire on the part of Congress to either eliminate or make permanent many of the perennially expiring tax credits.
The Senate Finance Committee and House Ways and Means Committee spent much of this year laying the groundwork for comprehensive tax reform through working groups and hearings that examined the effectiveness of many of the existing tax credits. While comprehensive tax reform was not achieved, the White House and Congress did reach agreement on a tax and spending compromise that temporarily extends or makes permanent 52 separate tax provisions that have expired—including QCDs—and funds the government through September 30, 2016.
On December 17, 2015, the House of Representatives passed the Protecting Americans from Tax Hikes (PATH) Act that extends or makes permanent many of the expired tax credits. The following morning they passed legislation funding the government for the full 2016 fiscal year. The Senate then passed H.R. 2029, which combines the PATH Act extending the expired tax credits and the Consolidated Appropriations Act of 2016 that funds the government. President Obama signed H.R. 2029 into law shortly thereafter.
Passage of this legislation provides certainty for IRA owners planning charitable distributions from their IRAs who previously were uncertain whether the provision would be in effect and the distribution would be tax-free. And, for IRA trustees and custodians, it eliminates the confusion and misinformation surrounding the popular tax credit.
That said, it is important to remember that comprehensive tax reform is still on the congressional radar screen, and all tax credits—including QCDs—are likely to be scrutinized as part of the reform process. Stay tuned.