Sunday February 25, 2024
IRS Encourages IRA Gifts To Charity
It is helpful for traditional IRA owners to understand how to do a QCD, what is required to report a QCD on a tax return and the required information of acknowledgment from the nonprofit.
1. How to Set Up a QCD — A traditional IRA owner may contact his or her IRA trustee to start the process for a QCD. While distributions from a traditional IRA are normally taxable, the QCD payouts will be tax-free as long as they are paid directly to a qualified nonprofit. The QCD is made through a check payable to the charity. An electronic payment or a check made out to the IRA owner does not qualify as a QCD. The owner must be age 70½ or older and the 2023 limit is $100,000. If spouses are both over age 70½ and have separate IRA accounts, then the $100,000 per person limit may allow a couple to distribute up to $200,000 per year to charity. Because the QCDs are not taxable, there will be no charitable deduction.
2. How to Report Your QCD — Your QCD must be reported on your 2023 federal income tax return. You can expect to receive an IRS Form 1099-R from your IRA trustee, with the traditional IRA distribution in Box 1. You must report the IRA distribution on Line 4 of IRS Form 1040. You will enter the total amount of the IRA distribution on line 4a. If the full amount is a QCD, you then enter zero on line 4b. If part of the distribution is a QCD, the taxable portion is normally entered on line 4b. You must enter "QCD" next to line 4. If you have entered zero on line 4b, the entire QCD will not be taxable.
3. Nonprofit’s QCD Acknowledgment — Your QCD is not deductible as a charitable contribution. However, you are required to obtain a written QCD acknowledgment from the nonprofit prior to filing your return. This acknowledgment should state the date and amount of the QCD and indicate that the donor has received "no goods or services in exchange for the gift." You should retain the acknowledgment with your other 2023 tax records.
Editor's Note: Many individuals will fulfill part or all of their RMD this year through a gift to charity from a traditional IRA. It is best to start the gift process no later than early December. Some IRA custodians may take time to process the transfer. If a donor has the right to make distributions from his or her traditional IRA through a checkbook, it will be important to send the check directly to the charity. Please allow sufficient time for the charity to deposit the check and for the financial institution to process the check. This process must be completed by December 31, 2023.
Proposed Regulations on Donor Advised Funds
On November 14, 2023, the IRS published REG-142338-07. These proposed regulations cover donor advised funds and excise taxes on taxable distributions.
Donor Advised Fund Definition
A donor advised fund (DAF) is defined under Sec. 4966(d)(2)(A) as a separately identified fund that is owned and controlled by the nonprofit and with respect to which a donor has advisory privileges. The donor also may appoint or designate another individual to have concurrent or successor advisory privileges.
The DAF does not include a field of interest fund with a single identified organization or governmental agency entity. Sec. 4966(d)(2)(B)(i). Other exceptions include funds for travel, study, or similar purposes, or advisory privileges in which the donor-advisor is a member of a committee, the grants are made on an objective and nondiscriminatory basis and the donor does not have a controlling interest. Sec. 4966(d)(2)(C).
Sponsoring Organization Requirements
The sponsoring organization is defined under Sec. 170(c) but excludes a private foundation under Sec. 509(a)(3).
Excise Tax on Taxable Distributions
There is a 20% excise tax on taxable distributions made from a DAF. A taxable distribution is generally defined under Sec. 4966(c)(1) as a payment to a natural person. The excise tax is 20% of the amount of the taxable distribution from a DAF and is paid by the sponsoring organization. Sec. 4966(a)(1).
A DAF distribution that is not made for a Sec. 170(c)(2)(B) purpose must be qualified through expenditure responsibility under Sec. 4945(h). A taxable distribution exception exists for a payment to a Sec. 170(b)(1)(A) nonprofit (other than a disqualified supporting organization). The distribution may also be made directly to the sponsoring organization or another qualified DAF. The distribution may not be made to a Type III supporting organization that is not functionally integrated, or any other supporting organization that is directly or indirectly controlled by the donor, donor-advisor or a related party.
Distributions are prohibited if the donor, donor-advisor or related party receives the distribution and there is more than incidental benefit. There is a general exception for reasonable investment and grant-related fees, so long as there is no more than incidental benefit. These are permitted if "charged uniformly or ratably across all DAFs generally." However, a fee paid solely for one DAF to a donor, donor-advisor or related person is subject to Sections 4966 and 4958.
Taxable distributions will also occur for payments to organizations for nonqualified purposes. This includes payments to nonqualified organizations or payments that are made for political campaign intervention.
Excise Tax on Fund Manager
A fund manager is defined as an "officer, director, or trustee of the sponsoring organization" and could be subject to excise tax. Sec. 4966(a)(2) requires the fund manager to pay a 5% excise tax if he or she knowingly makes a taxable distribution. The fund manager may also include individuals in the organization with similar responsibilities. If there are multiple fund managers for the organization, then all will be jointly and severally liable with respect to the distribution. The limit with respect to one taxable distribution is $10,000. If a donor-advisor receives a payment with more than an incidental benefit, he or she also may be subject to an excise tax.
The definition of advisory privileges may depend on a facts and circumstances test. If the donor reasonably expects to have advisory privileges, there could be a DAF. The four-part definition includes a donor who is allowed to provide nonbinding recommendations, a written agreement that grants advisory privileges, marketing material that indicates the donor may provide advice and a pattern of the sponsoring organization soliciting advice prior to distributions.
The donor-advisor is a donor or individual who has an advisory role, such as an investment advisor to the donor. The investment advisor to the donor may provide advice to the organization if all DAFs are similarly managed. The advice or recommendation must be based on objective criteria and may be in committee form if there are three or more members. The investment advisor defined in Sec. 4958(f)(8)(B) provides investment advice. This is permitted if the investment advisor provides "services to the sponsoring organization as a whole, rather than providing services to the DAF."
A personal investment advisor who is considered a donor-advisor could be subject to the excess benefit transaction rules of Sec. 4958(c)(2) if the advisor receives a grant, loan, compensation or similar payment from the DAF.
Anti-Abuse Identified Organization Rule
A single identified organization is not a DAF. However, there is an "anti-abuse” rule that indicates the use of a single identified organization may not be available if the donor retains the right to advise distributions from the single identified organization to other entities. If the donor is a member of the board of the identified organization, the donor may create separation by certifying to the organization that he or she has retained no ability to advise regarding distributions and that there will be no more than an incidental benefit to a donor, donor-advisor or related person.
Disaster Relief Exception
In Notice 2006-109, the IRS created an exception for disaster relief funds that excludes them from DAF status. The requirements to be excluded are that the fund must provide relief for a qualified disaster, there is a charitable class of beneficiaries, the selection committee is not controlled by a donor, donor-advisor or related party and grant recipients are based on an objective and nondiscriminatory determination of need.
Applicable Federal Rate of 5.8% for December — Rev. Rul. 2023-21; 2023-49 IRB 1 (15 November 2023)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2023. The AFR under Sec. 7520 for the month of December is 5.8%. The rates for November of 5.6% or October of 5.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”