By Andy Ives, CFP®, AIF®
IRA Analyst

Earlier this month, a tax notification service released information declaring that “North Carolina Governor Roy Cooper signed legislation allowing an income exclusion for distributions from individual retirement accounts (IRAs) to charities by taxpayers age 70½ or older. Beginning with the 2019 tax year, North Carolina conforms to the federal income exclusion from personal income tax for a qualified charitable distribution from an individual retirement plan by a person who has attained the age of 70½.”

Were individuals living in North Carolina ineligible to do QCDs prior to the governor signing this legislation? No – QCDs were certainly allowed in North Carolina. Every IRA owner who is otherwise eligible to do a QCD can do so. What this announcement was referring to is the impact QCDs have on state taxes.

The most significant benefit of a qualified charitable distribution is realized at the federal level where QCDs are not counted toward AGI or taxable income. To report a QCD, you basically subtract from your total IRA distributions the amount you gave to charity and write “QCD” in the margin.

However, each state operates independently and taxes income differently. Not all states conform to federal law with respect to QCDs. Some states require a donor to add back the entire QCD amount and include it as income, thus allowing zero QCD deductions at the state level (i.e., New Jersey, which uses a gross income tax). At the opposite end of the spectrum, some states allow a full charitable deduction, and seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) have no personal income tax at all. The remaining states fall somewhere in the middle.

Some states have partial exclusions for retirement income. Others exempt retirement income altogether. Here, a QCD adds no benefit at the state level since any IRA distribution is already exempt from state tax. Pennsylvania is a good illustration. It does not tax any retirement distributions. For those in the Keystone State, there is no state tax on Roth conversions or RMDs.

When determining taxes due, some states begin with the federal adjusted gross income, which means they indirectly allow QCDs. New York State falls into this category. Before the new legislation, North Carolina also started with AGI from the taxpayer’s federal return, but it forced state taxpayers to add back the QCD exclusion. The new law eliminates that adjustment and allows QCDs from the federal return in the Tar Heel State.

The state tax savings on a QCD is only a small percentage of the overall benefit. It is at the federal level where QCDs are most valuable. That’s where the big tax savings reside since federal rates are typically much higher than state tax rates. However, state tax savings can also be beneficial. Regardless of where you live, recognize that state tax rules vary widely. Donors using QCDs should consult a tax advisor to fully understand the impact on their state tax liabilities.