In January the tax reform made a dramatic increase to the standard deduction, while also limiting some of the things you can itemize. Those who are over age 70½ may feel the impact of their required minimum distributions (RMDs) a little more this year. If you are taking RMDs but don’t really want or need the money, a qualified charitable distribution (QCD) may be a good way to distribute the minimum required amount out of the IRA, avoid the penalty, and satisfy your charitable intents.
A qualified charitable distribution (QCD) is a tax strategy allowing you to transfer up to $100,000 per year from your IRA directly to a qualified charity, bypassing you (the owner) so you won’t be taxed on it. In addition to giving to a charity, a QCD excludes the amount donated from your taxable income, reducing the impact of certain tax credits and deductions, including Social Security and Medicare.
Do I qualify to make a QCD?
- You must be 70½ or older to be eligible to make a QCD
- The funds must be directly transferred from the IRA custodian to an eligible charity
- The maximum amount that can be donated through a qualified charitable distribution is $100,000 per year per IRA owner
- For a QCD to count towards your current year’s RMD, the funds must come out of your IRA by your RMD deadline, generally December 31
- The charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions
- Private foundations and Donor-advised funds do not qualify as an eligible charity under the QCD
For those taking the standard deduction rather than itemizing, a QCD is the only way to get a tangible tax benefit from charitable donations. A QCD is reported as a normal distribution on IRS Form 1099-R. While the QCD amount is not taxed, you also may not claim the distribution as a charitable tax deduction. Currently, your IRA custodian is not required to specially identify the QCD on your annual 1099-R form. Because of that, the responsibility is on you to inform your tax preparer that you performed a QCD. If you don’t let your preparer know, they will likely report this transaction as fully taxable, which would negate the benefit of your smart planning.
A tax advisor can help you determine if both your IRA and charitable contributions qualify for QCDs.
– Christina Mangino, Sr. Wealth Advisor
Surevest Private Wealth