Back in 2006, a law was passed making it possible for people over age 70 ½ to make tax-free charitable donations directly from their IRAs; these donations are called qualified charitable distributions (QCDs). On the surface, it just looks like another way to get a tax break by giving to charity, such as itemizing deductions. However, the benefits of this law are multifaceted, making it much more powerful and advantageous than simply itemizing.
Benefits Of Qualified Charitable Distributions
One of the greatest advantages of QCDs is that they can count toward your IRA’s annual required minimum distribution (RMD). An RMD is the amount of money that you are required by law to remove from your IRA once you reach age 70 ½. Anyone with a traditional IRA has to start taking RMDs at that age or they will be penalized.
Since they count toward your RMD, a QCD can be used as a way to fulfill your RMD without raising your tax liability. For instance, if you are required to withdraw $10,000 this year, you could transfer $5,000 directly to charity tax-free and only have to withdraw and pay taxes on $5,000 more.
Because it is a direct transfer and never shows up on your tax return, making a QCD also lowers your taxable income. With a lower taxable income, you not only pay less in taxes but it helps with eligibility for tax credits and other deductions. In addition, taxable income also affects Medicare costs and the taxes due on Social Security benefits.
The recently passed Tax Cuts & Jobs Act (TC&JA) makes QCDs even more appealing. Normally, to receive a tax benefit for charitable giving, you have to itemize your deductions. The TC&JA nearly doubled the standard deduction, so fewer people will be itemizing and getting credit for their charitable giving. With a QCD, you don’t have to itemize to receive the tax benefits. You can take the new, higher standard deduction and still do all of your giving tax-free.
Qualified Charitable Distribution Eligibility
Unfortunately, not everyone is eligible to make QCDs. First of all, you have to have the right kind of IRA. Eligible accounts are traditional, rollover, inherited, inactive SEP, and inactive SIMPLE plans. Inactive is defined as having received no employer contributions during the plan year that ends during the tax year that the QCD is made. These are the additional requirements:
- You must be age 70 ½ or older.
- Total QCDs cannot be greater than $100,000 per taxpayer each calendar year, no matter the number of charities donated to.
- QCDs cannot exceed the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
- Funds must be distributed directly to the charity. If you take a distribution and then give it to charity, it does not count as a QCD.
- The charitable donation cannot be made in exchange for a charitable gift annuity.
- The funds must come out of the IRA account by December 31 (or the deadline for your RMD) to count toward the year’s RMD. Excess donations cannot be carried forward to count toward future year RMDs.
Charitable Organization Eligibility
Only 501(c)(3) organizations that are eligible to receive tax-deductible contributions can receive QCDs. On top of that, certain types of those organizations are ineligible to receive QCDs. They are:
- Donor-advised funds managed by public charities on behalf of individuals, families, or organizations
- Private foundations
- Charitable remainder trusts
- Supporting organizations (charities that only exist to support other exempt organizations, usually public charities)
How I Can Help
If you are age 70 ½ or over, qualified charitable distributions may be a great tool for you. You can save on your taxes while leaving a legacy by supporting causes that matter. Before attempting a QCD, though, it’s important to ensure that both your IRA and charity of choice are eligible.
Wealth Management Group, LLC can help you determine eligibility, execute transactions, and strategize how to incorporate QCDs into your overall financial plan. If this sounds like something you could benefit from, call me today at (214) 644-2564 or email me at firstname.lastname@example.org.
Bob Rothe is a financial advisor and the president of Wealth Management Group, LLC. Along with nearly 40 years of industry experience, he is a CERTIFIED FINANCIAL PLANNER™ professional, with advanced knowledge of comprehensive financial planning that’s personalized to his clients’ needs. He specializes in wealth management for pre-retirees and retirees. Based in Allen, Texas, he serves clients in Collin County, the DFW metroplex, and throughout Texas and other areas of the country. Learn more by connecting with Bob on LinkedIn.