Qualified Charitable Distributions: How QCDs Could Boost Charitable Giving This Year

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Much has been written about how the Tax Cuts and Jobs Act that was signed into law in December could result in fewer people giving money to charities.

With the standard deduction having been increased substantially, fewer people could end up itemizing deductions. This, in turn, could reduce the tax incentive to make charitable contributions since they aren’t deductible for non-itemizers.

But there’s a provision in another piece of tax legislation that makes a certain kind of charitable giving strategy even more attractive. Specifically, the Protecting Americans from Tax Hikes (PATH) legislation made charitable IRA rollovers permanent.

Also known as qualified charitable distributions (or QCDs), this technique was originally introduced in 2006 as a temporary tool that had to be renewed by Congress every year. Now that it has been made permanent, you can incorporate the strategy into your long-term tax and charitable giving strategies, starting this year.

How QCDs Work

QCDs are designed specifically for individuals and couples who are at least 70½ years old. At this age, traditional IRA holders must begin taking required minimum distributions (or RMDs) from their account. These distributions are taxed at ordinary income tax rates, which can put an additional tax burden on retirees’ finances.

Making QCDs to qualified charitable organizations is a way for you to meet RMD requirements, save on taxes and benefit your favorite charities — all at the same time. QCDs count toward RMD totals but aren’t taxable to you, so you aren’t faced with additional taxes during retirement.

You can make up to $100,000 per year in qualified charitable distributions. The gifts can be made to a single charity or as many different charities as you like. The only requirement is that the organization meets the IRS criteria for a qualified 501(c)(3) organization.

Other Benefits of QCDs

Relief from paying income taxes on RMDs isn’t the only potential benefit of QCDs. Another possible benefit is the fact that these distributions aren’t counted as a part of taxable income. This could make it possible to realize tax benefits from making charitable contributions even if you take the standard deduction instead of itemizing.

Also, QCDs don’t have an impact on your adjusted gross income (AGI). Some taxes and tax breaks are phased out at certain AGI levels, including those for itemized deductions, Roth IRA eligibility and the net investment income tax. This could end up being beneficial from a tax standpoint.

Initiating a QCD may also enable you to get around the restriction that limits charitable giving to 50 percent of AGI, since the distribution effectively reduces AGI. The strategy could also reduce capital gains taxes on IRA distributions since these distributions will be excluded from taxable income.

Initiating a QCD

To initiate a QCD, you’ll submit a distribution form to your IRA custodian naming the charity you want the funds distributed to and specifying how much you want to donate. The most critical thing to remember here is that the distribution must be made directly from the IRA to the charity.

In other words, the check should be made out to the charity, not to you. Otherwise, the distribution won’t be considered a QCD even if you intend to give the money to charity after you deposit the check. You can have the check sent to you if you want to hand-deliver it to the charity personally, or just have it sent directly to the charity.

Also note that QCDs can only be made from traditional, inherited or rollover IRAs, not from SIMPLE IRAs or SEP IRAs. RMDs don’t apply to Roth IRAs, so QCDs aren’t generally used with them. And you must be at least 70½ years of age or over by the end of the year in which you make the distribution to initiate a QCD.

A Welcome Change

The PATH Act provision making qualified charitable distributions permanent is a welcome change for many retirees who want to reduce the tax impact of making RMDs from their traditional IRAs.

Now is the time to think about whether utilizing QCDs could be a beneficial strategy for you this year. Be sure to consult with a tax professional for more detailed guidance given your specific situation.

The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC's ("Frontier") investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.

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