Qualified Charitable Distributions
(and that hot chocolate in Winter feeling)
Whether you’re a once-in-a-while small-donor or a frequent and philanthropic contributor, making charitable donations might result in a tax bill decrease. If donors who were partially motivated by the tax relief decide to stop giving, it will harm those groups’ financial balances.
Fortunately, there are tax-saving strategies that can keep both donors and receivers on track with charitable giving.
In general, a Qualified Charitable Distribution (QCD) is an otherwise taxable payment made directly from an IRA to a qualified charity by an individual who is aged 70½ or older. Unlike traditional IRA withdrawals, the sum given to a QCD is not taxed. Qualified Charitable Distributions are only counted in the year they are made.
When a QCD is made, the charitable donation made by an IRA owner is not included in their gross income.
Gifting to Charities After Age 70½
Joint giving is not allowed in QCDs, so a couple cannot withdraw both of their aggregate required minimum distribution (RMD) amounts from a single account and deduct the full amount from their adjusted gross income. For both of them to qualify, they must take their RMDs from their individual accounts.
What Are My Options for Making a QCD?
While many IRAs are eligible for QCDs, there are certain restrictions.
The amount that can be invested in QCDs is restricted to the amount that would otherwise be taxed as ordinary income. Non-deductible contributions are not included.
The maximum amount eligible for a QCD is $100,000 per year. This refers to the total amount of QCDs given to one or more charities over a calendar year.
To be included against your current year’s RMD, a QCD must be taken out of your IRA by the RMD deadline, which is usually December 31.
What Types of Charities Are Eligible?
The charity must be a 501(c)(3) entity, which means it may accept tax-deductible donations.
Qualified charitable distributions are not available to all charities. Here are a few examples of charitable organizations that do not qualify:
- Foundations run by private individuals or companies.
- Supporting organizations: i.e., a charitable organization that operates based on supporting other charitable organizations, usually other public charities.
- Public charities that are managed by donor-advised funds on behalf of families, organizations, or individuals.
Before transferring funds, make sure the charity is eligible.
Guidelines for Payment
When it comes to QCDs, the most important thing to remember is that all distributions must be given directly to the charity, not to the owner or recipient. This implies that the check should be written out to the charity, otherwise it would be considered a taxable distribution.
Charitable gift annuities, for example, will not qualify. The charity must also provide a written receipt to prove the gift amount.
A qualified charitable distribution does not entitle the donor to any benefits. It can’t be used to buy seats at a charity event or items at a fundraising auction.
What Is the Minimum Distribution You Must Make?
The minimum amount you must withdraw from your account each year is known as your mandated minimum distribution. When you reach the age of 72, you must take withdrawals from your IRA, SIMPLE IRA, SEP-IRA, or 401(k) plan account.
As long as certain requirements are followed:
- A qualified charitable distribution can be used to meet your required minimum distributions for the year.
- Once you reach RMD age, your QCD counts toward meeting your RMD.
- You can donate your RMDs to an eligible charity up to a maximum of $100,000.
- If you use the RMD service, make sure to account for these gifts so you don’t end up with more than your yearly RMD.
The Internal Revenue Service mandates that you take a minimum amount of money out of certain types of retirement accounts each year. Calculate the minimum distributions you’ll need.
Tax Saving Strategies
A QCD can help you meet your year’s required minimum distribution and lower your tax liability.
How to Save Money on Taxes
Let’s give an example of a $350,000 IRA and the RMD is $17,000 for the year. You’ve met both your RMD of $17,000 in charitable giving for the year if you make at least $17,000 in QCDs. Although the funds are taken from your regular IRA, there is no gross income shown on your tax return.
A QCD can be a smart approach during the year when all or part of a conventional IRA is converted to a Roth IRA; regardless of when the conversion occurs throughout the year, you must still make your RMD for the year. The RMD sum will not be able to be converted.
You’d have to include the RMD in gross revenue along with the converted amount if you didn’t have the QCD. Making a QCD with the RMD amount is an alternative. As a result, the RMD amount is not included in your gross income.
The QCD rule is also available to Roth IRA owners; however, they will not profit from it because their distributions are already tax-free.
Accounting for Taxes
For non-inherited IRAs, a qualified charitable distribution is reported as a regular distribution on IRS Form 1099-R. The QCD will be recorded as a death payout for inherited IRAs or inherited Roth IRAs. Your tax records should include a donation acknowledgment from the charity.
Donations do not need to be itemized. You cannot claim the distribution as a charitable tax deduction since the QCD amount is not taxable.
When you utilize pre-tax money for QCDs, you lower the amount of pre-tax money in your IRA. Future income taxes can be lowered by converting or distributing IRA money to Roth IRAs.
Donating While Saving
Philanthropic individuals who are unable to itemize their deductions can use qualified charitable distributions to satisfy their RMD obligation and still provide assistance to their favorite foundations.
If correctly implemented, the QCD rule will give charitable IRA owners a tax benefit for years to come.
For anyone who is already 70½ but is unfamiliar with the QCD strategy, please reach out to one of our advisors today to talk about your specific situation and any questions you might have.
Written by Matthew Delaney