Charitable Distribution from IRA 1000px
By: Todd Schanel, CFA, CPA, CFP®
on May 10, 2017

Would you like to help your favorite not-for-profit organization and save taxes at the same time? The Qualified Charitable Distribution rules allow taxpayers to make IRA distributions of up to $100,000 directly to charities without including the distribution in their taxable income. A QCD counts toward your Required Minimum Distribution (RMD), and it can save you on taxes over making the same size donation by check.

This provision of the tax code was first introduced in 2006 but was subject to cycles of expiration and last-minute extensions for nearly a decade. Then in late 2015, Congress finally made it permanent. Now that it’s permanent, you have the opportunity to evaluate this as part of your tax planning and giving strategy.

Beginning at age 70 ½, IRA owners must begin taking IRA distributions. For some retirees, this mandatory increase to income comes with an unwelcome increase in Federal taxes. And if you don’t take that RMD, the penalty is a whopping 50% of the amount that should have been distributed.

A QCD can help you achieve your giving strategy and save you taxes at the same time. It counts towards your RMD, but it won’t increase your taxable income or your AGI. By bypassing the standard charitable deduction on your tax return, a QCD can save you on taxes overall.

How to take a QCD

  1. As with all provisions of the tax code, you’ll need to follow the rules to make it work correctly:
  2. The IRA owner must be age 70 ½ or older.
  3. The donation must be to a 501(c)(3) organization. Donations to private foundations, donor advised funds, or split-interest charitable trusts don’t qualify.
  4. The payment must be made directly to the charitable organization. It’s OK if your IRA trustee mails the check to you, and you forward the check to the charity. But the payee on the check must be the charitable organization. It won’t work if the check is made out to you and you write another check to the charity.
  5. The maximum that qualifies as a QCD is $100,000. Any excess over this amount won’t count towards future RMDs.
  6. The distribution can be from a traditional IRA, an inherited IRA, a rollover IRA or an inactive SEP or SIMPLE IRA. It can also be made from a Roth IRA, but there are no tax benefits in this case. Check with our office to see if this would be a good option for you.
  7. Make sure you get an acknowledgment from the charity of this donation.

This must be completed by December 31. Some financial institutions won’t count this as a current year distribution if the check isn’t cashed by year end.

How this saves on taxes

As stated above, a QCD is a better deal tax-wise than taking a distribution and writing a check to your favorite charity. A regular distribution increases your Adjusted Gross Income (AGI), which has cascading effects on your tax return.

A higher AGI can lead to phase-outs of your itemized deductions and allowed exemptions. It may also increase the amount of your Social Security payment that’s taxable. And if your AGI is greater than $250,000 for a couple filing jointly, your investment income will be subject to the additional 3.8% net investment income tax.  A direct transfer to a charity keeps the entire donation out of your taxable income.

Once you take either a regular IRA distribution or a QCD, the transaction can’t be undone. So be sure to call our office beforehand if you’re thinking of using this great strategy to help your favorite not-for-profit organization and save taxes at the same time.

Does this sound like a useful tool for your tax-saving and giving strategy?  Call our office at 561-624-2118 to discuss QCDs with one of our professionals!

 



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