By Justin Fundalinski, MBA | April 20, 2018
With the new tax law doubling the standard deduction it is going to be much harder to itemize your tax deductions. Unfortunately, for those who give to charities this change may cause their charitable gifts to be far less valuable from a tax prospective. However, there is an excellent way to give to qualified charities as well as reduce your taxable income if you are over 70½. If you haven’t already, it’s time to start making Qualified Charitable Distributions (QCDs) from your IRA.
What is a QCD?
Technically, a QCD is a direct transfer of IRA funds payable to a qualified charity. Less technically, it is a charitable donation that is paid from your IRA account.
What are the benefits of a QCD?
QCDs come with enormous tax benefits:
- First, they are distributions from your IRA that are completely tax free. The “deduction” for
a QCD is taken on the first page of your 1040. That is, your total taxable distribution from your IRA is simply reduced by the amount of your QCD. There is no need to itemize this deduction, and there is no special schedule for you to file (simply appropriate reporting)
- Second, they count toward your Required Minimum Distribution. If you ever felt burdened by the taxation of Required Minimum Distributions this is a great way to offset those pesky taxes.
- Third, it lowers your modified adjusted gross income figures which can reduce the taxation of Social Security as well as reduce your Medicare premiums.
What are the rules for making a QCD?
There are a few guidelines that must be followed for a QCD to be eligible:
- You must be 70½ or older. That is, Required Minimum Distributions have become a part of your normal life.
- Your QCD must be made to a 501(c)(3) organization. Funds distributed directly to you and then given to charity do not qualify as a QCD. Private foundations, donor advised funds, and supporting organizations do not qualify.
- For a QCD to count towards your current year’s Required Minimum Distribution, the funds must come out of your IRA by your Required Minimum Distribution deadline. Amounts above and beyond your Required Minimum Distributions do not count toward satisfying a future year’s Required Minimum Distributions.
- The maximum annual amount that can qualify for a QCD is $100,000. This applies to all QCDs made in a calendar year, not for each individual charity. If you file taxes jointly your spouse is also eligible for $100,000 of QCDs.
- QCDs are allowed from inherited IRAs, however you must be still be over 70½ to be eligible.
- QCDs are limited to the amount that would otherwise be taxed as ordinary income. Basically, this rule excludes non-deductible/after-tax contributions that you may have made to your IRA which would be received back in a tax-free manner anyway.
What do you need to watch out for?
If you are following all the rules listed above, there is likely only one major thing to watch out for. Your IRA custodian does not report your QCD distribution in any special format to notify the IRS that you made a QCD. That said, your 1099-R will reflect the full distribution from your IRA and will show it as a taxable. It is up to you to let your tax professional know that you made QCDs so that they can report the distribution appropriately to the IRS.
If you would like to learn more about QCDs or how you make QCDs, please feel free to reach out to us directly at the office.