Upon reaching age 70 ½, owners of traditional IRAs must begin taking required minimum distributions. If you are in a position to not need the funds from your IRA distribution for living expenses and have a desire to donate to charity, qualified charitable distributions may be a tax saving tool you can use.
What is it?
Qualified charitable distributions (QCDs) are IRA distributions that are distributed directly from the IRA custodian to the charitable organization. This makes an otherwise taxable IRA distribution, tax-free. However, since the distribution is not subject to federal income tax, the charitable deduction is likewise disallowed.
What are the benefits?
Since the standard deduction has doubled, many people no longer itemize their charitable deductions. As such, QCDs can equate to a 100% above-the-line tax deduction. For example, a QCD might save someone $2,500 in tax on a $10,000 donation. That’s real money! Second, donating to charity in this way bypasses the annual 60% of adjusted gross income (AGI) limitation on contributions. Third, since QCDs are not included in a taxpayer’s AGI, the chances are minimized of being negatively impacted by other AGI based tax provisions such as the taxability of social security benefits and the phase-out rule for the $25,000 rental real estate loss exception.
What are the Specifics?
- On the date of distributions, QCDs are only available to taxpayers age 70 ½ and older.
- The QCD satisfies the required minimum distribution requirements.
- The distribution must be distributed directly by the IRA custodian to the charitable organization. The taxpayer cannot receive the distribution and then donate the funds to charity. This is very easy to do by the way, as IRA custodians do this all the time!
- The charitable organization must be a qualified public charity [501(c)(3)] and cannot be a private foundation or donor advised fund.
- QCDs may be made from traditional IRAs, inactive SEP IRAs, inactive SIMPLE IRAs, and Roth IRAs (in certain circumstances). It is typically more advantageous to make the distribution from a traditional IRA over a Roth IRA. The rule cannot be used for distributions from ongoing SEP accounts, ongoing SIMPLE accounts, or qualified retirement plan accounts such as 401(k) or 403(b) accounts.
- The maximum amount allowed per taxpayer per year is $100,000.
If you are interested in learning more about how you may benefit from making qualified charitable distributions, contact your Ketel Thorstenson tax professional at 605-342-5630.