Qualified Charitable Distributions – Easy as Writing a Check!

Patrick Cote |

BY: SUSAN POWERS, CFA, CPA, CFP®, CPFA

Using an IRA to make a charitable donation can help a worthy cause and help lower your tax bill as well.  As we approach the fourth quarter, you may be reviewing your charitable giving strategies with a financial and tax advisor as part of your year-end planning.  While some tax efficient giving strategies can be a bit complex, qualified charitable distributions (QCDs) are as easy as writing a check to your favorite charities!

What is a QCD?

The QCD rule allows IRA owners aged 70 ½ and older to reduce the ‘taxable amount’ of their IRA distributions for any contributions made directly from the IRA to a qualified charity.  Most churches, nonprofit charities, educational organizations, nonprofit hospitals, and medical research organizations are qualified 501(c)3  organizations.

How does it work?

Typically, any distributions from an IRA other than a Roth IRA are considered taxable income since the taxpayer did not pay taxes on the money when it was originally contributed to the IRA. 

QCDs:

  • Are not considered taxable income when made directly from your IRA account
  • Can be used to meet and even exceed your required minimum distribution (RMD)
  • The maximum annual amount that can qualify for a QCD is $100,000 in a calendar year
  • The maximum amount is available even if it exceeds your RMD.

For example, if you take IRA distributions of $12,000 but $5,000 of the total is checks payable to qualified charities, your ‘taxable amount’ is only $7,000.

This rule might appear to affect only wealthy taxpayers who give generously, but it also affects anyone retired with less income who still wants to make a deductible donation.

Important Considerations

What if I’m not taking RMDs?

Your required minimum distribution (RMD) is the minimum amount you must withdraw from your account each year starting at age 72.  Prior to January 1, 2020 the age was 70 ½ and continues to be the effective age for making QCDs.

Why is that important for tax purposes? 

You may already be deducting any charitable contributions on your tax return.  However, the Tax Cuts and Jobs Act passed in 2017 effectively eliminated itemized deductions by increasing the standard deduction and capping or eliminating other deductible expenses.  By 2019, less than 14% of taxpayers still itemized their deductions. 

Even if you can itemize your deductions, using your charitable gifts as QCDs to reduce your adjusted gross income instead may provide a higher overall tax savings.  The more taxes you save, the more you can give!

You mentioned a check?

Yes!  Many IRA custodians offer check writing services to make this process very easy.  Call your advisor or IRA custodian to see what services they offer.  All distribution checks need to be made payable to the charity or they will be counted as taxable distributions.  You will also want to keep all receipts to document your contributions. 

Questions?

Do you have questions about year-end planning opportunities or your charitable giving strategies?  We can help with these questions and many more.  Call us to explore in detail how strategies like QCDs can help you!