March 12th, 2019
For individuals 70 ½ or older, Qualified Charitable Distributions (QCD) can be an excellent way to donate to qualified organizations which may be close to the heart, while also enjoying the financial benefits made possible by supporting a charitable cause. Using QCDs is a way to give directly to a charity, from your IRA, while taking advantage of the many tax benefits available as a result.
Tax Advantages to Making QCDs
- Reduce your Required Minimum Distribution (RMD). The amount you choose to donate directly from your IRA to charity reduces your RMD, and in turn reduces your adjusted gross income (AGI). This helps you by reducing your taxable income and, therefore, your income tax bill.
- Even if you don’t itemize… As this amount is not included in income, it is not a charitable contribution if you itemize your deductions. However, as the Tax Cuts and Jobs Act of 2017 increased the standard deduction and significantly decreased the number of people who itemize their deductions, this is a way to continue to receive a tax benefit for charitable contributions, even if you do not itemize.
- Additional tax benefits of lowering your AGI. Certain calculations on your tax return are based on your AGI including future Medicare Premium Costs, the taxable portion of Social Security, and Net Investment Income Medicare surtax. As QCDs lower your AGI, you may have additional ways to save money.
Things to Keep in Mind
- Only individuals over age 70 ½ can make a QCD.
- The maximum annual amount that an individual aged 70 ½ or older can give via a QCD to a qualified charity is $100,000. If you file taxes jointly, your spouse can also make a QCD from his or her own IRA within the same tax year for up to $100,000, assuming they too are over 70 ½.
- Charitable contributions can go to any number of charities, but they must be 501(c)(3) charitable organizations; private foundations and donor-advised funds do not qualify for QCDs.
- Funds must come out of your IRA by your RMD deadline for a QCD to count toward the current year’s minimum. Any amount donated above your RMD does not work toward meeting a future year’s requirements.
- Distributions must go directly to the charity. You provide instructions to your IRA custodian, including the name and address of the charity to you which you wish to donate.
- Be sure to keep records on how much of your IRA distribution was distributed to you (taxable) and how much was distributed directly to charity/charities (non-taxable), so that your tax preparer can correctly report the distribution on your tax return.
- QCDs may be taken from a variety of IRAs, however they may NOT be taken from an employer plan, such as a 401(k) or 403(b).
- QCDs apply only to taxable amounts. You may not transfer your nondeductible IRA contributions or after-tax rollover funds to charity as a QCD.
With so many excellent 501(c)(3) charitable organizations working to further a variety of causes ranging from veterans’ needs to global environmental issues, and everything in between, individuals over age 70 ½ have a multitude of choices available to them when making donations from their IRA. The tax benefits only add to the appeal of QCDs. At Frisch, we can help you understand if QCDs might be a good option for you.