With the year-end in sight and holidays fast approaching, many people are starting to think about making charitable contributions in order to realize tax benefits and support charitable organizations and causes they believe in.
As you plan your year-end giving approach, you should consider a unique strategy that could help you accomplish several different objectives all at the same time. This strategy involves giving away money held in an individual retirement account using what’s referred to as a qualified charitable distribution, or QCD.
Financial and Tax Benefits
Using a QCD to make charitable contributions could help you realize a number of financial and tax benefits. This strategy is especially beneficial if must make required minimum distributions (RMDs) from your traditional IRA. Once you reach age 70½, you must start taking RMDs whether you need the money or not and pay taxes on the distributions at your ordinary income tax rate.
By making QCDs to the charitable organizations you support, you can satisfy your RMD obligations while also saving money on taxes and supporting your favorite charitable causes. Each year, you can contribute up to $100,000 in qualified charitable donations to one or more different 501(c)(3) charitable organizations.
QCDs are not considered taxable income by the IRS, so no taxes are due on the distributions. In addition, using a QCD to make charitable donations does not affect your adjusted gross income (AGI). This is important because a number of tax breaks and credits are phased out once you reach certain AGI levels, such as eligibility to open a Roth IRA and the net investment income tax. In addition, using a QCD could help you side-step the rule that limits charitable giving to 60% of your AGI.
Impact of Higher Standard Deduction
The Tax Cuts and Jobs Act that was passed at the end of 2017 raised the standard deduction to $12,200 per person for this year, or $24,400 for a married couple filing their tax return jointly. As a result, it’s no longer beneficial for some people to itemize deductions when filing their tax return. And if you don’t itemize deductions, you can’t deduct your charitable donations.
Making QCDs to charitable organizations enables you to realize tax benefits from your donations without itemizing by effectively increasing the standard deduction. This lowers your AGI and the amount of taxes paid.
An example helps illustrate the potential benefits of qualified charitable distributions. Bill and Marge are a retired couple who are both 72 years old. They have accumulated $500,000 in a traditional IRA but don’t need the money yet because they’re living comfortably on their Social Security benefits and a pension from Bill’s former employer. However, they are required to take RMDs annually and pay taxes on the distributions.
Bill and Marge are active in their local church and donate $12,000 each year to the church. If they were to donate this money from their IRA using a QCD, they could satisfy their RMD obligation while avoiding taxes on the distribution. In addition, they could claim a total standard deduction of $27,000, which includes an extra $2,600 since they’re both over 65 years old. This way, they could realize tax benefits from charitable giving without having to itemize deductions when they file their tax return.
To use a QCD, you must be at least 70½ years old by the end of the year when you make the distribution. Also, QCDs can only be made from traditional, inherited or rollover IRAs — SIMPLE IRAs and SEP IRAs don’t qualify.
It’s important to note that in order for a donation to be considered a QCD, the funds must be transferred directly from the IRA to the charity. This means that the check should be made payable to the charity. If the check is made payable to you and you deposit it and then write out a check to the charity, the distribution won’t be considered a QCD and you will lose any potential tax benefits.
Plan Giving Strategies Now
Now is a good time to begin planning year-end giving strategies. As you do, consider whether making qualified charitable distributions from your IRA could be a beneficial strategy for you. Be sure to consult with a financial and tax advisor for more detailed guidance in your particular situation.
Give us a call if you have more questions about charitable giving strategies and the potential benefits of making qualified charitable distributions from your IRA.