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Qualified Charitable Distributions: Doing Well While Doing Good

Recent changes in the tax laws make Qualified Charitable Distributions (QCD’s) more attractive for some people. If you are over the age of 70½ and you have an Individual Retirement Account (IRA), you may be eligible to make QCD’s to an eligible charity of your choice. This is a distribution of funds from an IRA that goes directly to a 501(c)(3) charitable organization. This strategy has become even more valuable to taxpayers since the standard deduction doubled in 2018. This means fewer taxpayers will be itemizing their deductions, so many of their charitable contributions will no longer be deductible. However, if you have an IRA and are subject to Required Minimum Distributions (RMD), you can exclude charitable contributions from your taxable income using a QCD, effectively restoring your ability to deduct your donations.

If you are over 70½ years of age, you probably know that you must begin taking RMD’s from your qualified retirement accounts such as IRA’s, 401(k) and 403(b) plans and other tax-deferred accounts. These distributions are fully taxable and are included in your Adjusted Gross Income (AGI). Funds donated through QCD’s can satisfy your required minimum distribution, but since they go directly to a charity, they will not be included in your taxable income.

For taxpayers who don’t have enough deductions to itemize, the QCD is the only way to realize a tax benefit from a charitable contribution. If you don’t itemize, you would take the standard deduction, and would use the QCD to exclude from income the charitable contributions that cannot otherwise be deducted. Even if you do itemize, having your IRA distribution excluded from income is preferable because it keeps those funds out of your Adjusted Gross Income. Many things are linked to AGI that can cost you, such as the income-related adjustment on Medicare premiums.

To make a Qualified Charitable Distribution, you’ll need to contact your IRA custodian and request that they send funds directly to the charity. Generally they will just need the name and address of the charity, and you’ll need to confirm that it qualifies as a 501(c)(3). Additional rules and limits apply:

• Donor must be 70½ or older.
• QCD is limited to $100,000 per taxpayer per year.
• Donation must be from a traditional IRA (not employer plans like SEP or SIMPLE IRA’s).
• Beneficiary IRA’s may be used, as long as the donor is at least 70½.

Some things to be aware of:

• Donor-advised funds are not eligible to receive QCD’s.
• Distributions will be reported as “Normal Distribution” on your form 1099-R. At present, this form does not identify the amount that is a QCD, so you must keep records of your donations in order to exclude them from income.
• If you itemize deductions, remember that you cannot deduct the charitable contribution if you have already excluded it from income.

Implementing a QCD strategy requires advance planning, as many people set up their RMD’s to be paid out on a monthly or quarterly schedule, beginning in January of the year they turn 70½. However, you must be at least 70½ when the contribution is made-unlike the RMD rule, it’s not “the year that you turn 70½.” You must wait until six months past your 70th birthday to make a QCD. If your birthday is in June, you turn 70½ in December. If you’ve been taking monthly distributions all year, there won’t be much left for QCD when you become eligible in December. You’ll need to plan for how much money to set aside for your QCD before you start taking periodic distributions.

There are many types of qualified accounts such as tax-deferred employer plans including 401(k), 403(b), 457 plans. These are all subject to Required Minimum Distributions or RMD. However, under current rules you can only do the QCD from an IRA. If you want to apply this strategy to another type of qualified account, such as a 401(k) or 403(b), you’d first need to roll that account over into an IRA. We recommend that you discuss such a move with your financial advisor and tax professional.

If you are over 70½ and own an IRA, and you’re going to make a charitable donation, consider speaking with your financial planner and tax advisor about using a Qualified Charitable Distribution.

This information is not intended to be a substitute for specific individualized advice. We suggest that you discuss your particular situation with a qualified tax advisor.