Though taxpayers of any age can donate to charity if they wish, using a qualified charitable distribution (QCD) to make a charitable gift is only allowed for taxpayers beginning at age 70 ½. This strategy may be particularly helpful to retirees who must take required minimum distributions (RMD) in retirement (note: the SECURE Act of 2020 raised the minimum age of those required to take RMDs from 70 ½ to 72, but the QCD start age remains 70 ½).
What is a QCD and why is it helpful?
Why is a QCD beneficial? First, it’s helpful to understand that IRA owners (beginning at age 72) must take an RMD every year, regardless of whether they need that income. Those distributions are taxed at ordinary income rates, which potentially could have unintended tax implications, including pushing a taxpayer into a higher tax bracket.
The QCD does not count as an income tax deduction. What the qualified charitable distribution allows a taxpayer to do is to take the amount of their RMD, up to $100,000 per tax year, and donate it to a qualified 501(c)(3) charitable organization. If you’re unsure if the organization you would like to donate to is eligible, you can search on the IRS website.
If you want to apply your RMD toward a QCD, whether wholly or partially, the amount you choose will be exempt from taxation. The QCD reduces adjusted gross income, potentially affecting taxable areas like Social Security and Medicare premiums positively.
Do’s and Don’ts with QCDs
If you’re ready to utilize QCDs as a charitable giving strategy, read below for guidelines on what you can and cannot do.
Qualified charitable distributions only apply with eligible IRAs, not other retirement accounts like a 401(k). QCDs are made directly from the IRA to the organization, which means you cannot take your RMD, then write a personal check to the charity with those funds and count it as a QCD on your tax return. Funds can be distributed to as many charitable organizations as you wish, up to the cap of $100,000.
You can exceed the amount of your RMD with a qualified charitable distribution, but please be aware that it will not count toward future required minimum distributions. QCDs cannot be applied to donor-advised funds or private charities. If you and your spouse want to make QCDs, it cannot be applied in a joint payment from one IRA, but payments up to $100,000 can be made from each of your separate IRAs.
You cannot receive any benefit (like goods or services) from a QCD - the charity is required to give you a receipt stating that nothing was exchanged for the donation.
The QCD must be made by December 31st to ensure that it counts toward your RMD of the current tax year. Come tax time, make sure your tax professional knows that the 1099 form you receive for the distribution is due to the QCD you made. Otherwise, it may not be reported correctly.
Is A Qualified Charitable Distribution Gifting Strategy Right for You?
If you are charitably inclined and want to receive some tax benefits, then using a qualified charitable distribution as a charitable giving and tax strategy may be right for you. It is important to discuss your options with your financial advisor and tax professional before making any decision that could affect your personal tax situation. If you have questions about this strategy, feel free to contact us today.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.