Global Tax Insights
Tax Saving Strategy: Qualified Charitable Distributions (QCDs)September 03, 2019
For those over age 70 ½, making a qualified charitable distribution from your individual retirement account can help you save taxes while meeting your charitable goals.
Are you over the age 70 ½? If you have an individual retirement account (IRA) you can use what’s called a Qualified Charitable Distribution (QCD) to save taxes while meeting your charitable goals, thanks to changes under the Tax Cuts and Jobs Act (TCJA).
- Removed some itemized deductions (miscellaneous itemized deductions like investment and tax preparation fees) and limited others (state and local taxes and real estate taxes).
- Raised the amount of the standard deduction for individuals and couples.
As a result, most taxpayers will take the standard deduction rather than itemizing their deductions. Check out our blog, Changes under the TCJA: To Itemize or Not to Itemize? Bear in mind also that your charitable giving will no longer generate tax savings if you take the standard deduction.
How can a QCD help?
A Qualified Charitable Distribution (QCD) can help you lower your taxable income and benefit the charities of your choice, because it does not have to be included in your income. It is considered an “above the line deduction” meaning that it is a reduction to your gross income as opposed to a potentially limited itemized deduction.
So how do you go about using a QCD?
There are a few requirements you must meet in order to take a QCD:
- You need to be 70 ½.
- You cannot exceed $100,000 in total QCDs in a year (any amount below is fine and you can contribute to as many charities as you wish, as long as it’s under $100,000). If you file taxes jointly, your spouse can also make a QCD from his/her own IRA within the same tax year for up to $100,000.
- You are required to direct the IRA fiduciary to pay the amount you choose DIRECTLY to the charity. You are not able to receive the funds from your IRA and then write a check to the charity.
- Most charities are qualified to receive a QCD, but make sure! The charity must be a 501(c)(3) organization; private foundations and donor-advised funds (DAFs) do not qualify.
How do Required Minimum Distributions (RMD) factor in?
As a refresher, your RMD is the minimum amount you must withdraw from your retirement plan each year. Typically, you must begin withdrawing from your IRA, SEP IRA, SIMPLE IRA or retirement plan account once you reach age 70 ½. For a QCD to count towards your current year’s RMD, the funds must come out of your IRA by your RMD deadline, typically December 31st (aside from your first RMD). Check out our blog, Are You Turning 70 ½ in 2019? Don’t Forget to Take Your First RMD.
Up to $100,000 of your RMD can be donated to a qualified charity if you’re 70 ½. Any amount donated above your RMD does not count towards satisfying a future year’s RMD.
For non-inherited IRAs, QCDs are reported as normal distributions on form 1099-R. For inherited IRAs and inherited Roth IRAs, they are reported as death distributions. You do not need to itemize to make a QCD and because the QCD amount is not taxed, you cannot claim the distribution as a charitable tax deduction.
State tax rules may vary, so it’s best to consult your tax advisor.
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