Benefits and Considerations of Donating to Charity Using IRA Qualified Charitable Distributions
Beginning in 2018, many individuals and families lost the ability to fully deduct charitable donations as an itemized deduction. This is due to the doubling of the standard deduction and the limitation of many itemized deductions as part of the Tax Cuts and Jobs Act of 2017. For those over age 70½, a qualified charitable distribution can be a great way to make a charitable donation in a tax-efficient manner.
What is a Qualified Charitable Distribution (QCD)?
Per IRS Publication 590-B, “A qualified charitable distribution (QCD) is generally a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax deductible contributions. You must be at least age 70½ when the distribution was made. Also, you must have the same type of acknowledgment of your contribution that you would need to claim a deduction for a charitable contribution.”
What is the Benefit of a Qualified Charitable Distribution (QCD)?
Taxpayers are able to use the qualified charitable distribution to satisfy part or all of their required minimum distribution (RMD) from their tax-deferred retirement accounts. Using the QCD to satisfy part or all of an RMD can allow a taxpayer to satisfy their RMD with less of a tax impact.
For example, if an RMD was $50,000 for 2018 and a taxpayer made a $20,000 nontaxable QCD, he would only need to make an additional $30,000 IRA distribution to satisfy his RMD, thus reducing the taxable income from his RMD from $50,000 to $30,000.
Rather than claiming the charitable donation as an itemized deduction, the QCD reduces the taxpayer’s adjusted gross income. Why is this important? The benefit of not including the donation as income could prevent an increase in Social Security taxation, an increase in Medicare premiums, or a reduction in deductible medical expenses, which is based on a percentage of the taxpayer’s adjusted gross income.
Furthermore, many taxpayers have lost the ability to fully deduct charitable contributions as an itemized deduction. Taxpayers in this situation are able to use the QCD to make a charitable donation in a tax-favorable manner, whereas they would otherwise not be able to claim a tax deduction.
How Do I Make a Qualified Charitable Distribution (QCD)?
Below are some considerations for making a qualified charitable distribution.
- You must be at least 70½ years old at the time of the QCD. If you request the QCD prior to age 70½, it is not a QCD and will be taxed as income. There are no exceptions to this rule.
- You can make a QCD from the following:
- Traditional IRA
- Inactive SIMPLE or SEP IRA (inactive meaning that they are not receiving ongoing contributions)
- Inherited IRA (keep in mind that you must be over age 70½)
- The QCD must go to a public charity. Donor-advised funds, private foundations, and supporting organizations are among the charities that are not eligible.
- Funds must be transferred directly from your IRA custodian and payable to the qualified charity. The check cannot be made payable to the IRA owner.
- You can make up to $100,000/year of qualified charitable distributions per person.
- The QCD must occur before December 31 of the current year to be applicable in the current tax year.
- You must self-report the QCD on your income tax return. Your custodian does not report to the IRS that a qualified charitable distribution has been made.
- Ensure that no taxes are withheld from the QCD. Because the funds go directly to a qualified charity, it is not treated as a taxable.
Because there may be additional considerations, we recommend working with your financial planner and tax professional to determine if this is the best strategy for you and to navigate the stringent requirements.