Tax-Savvy Charitable Giving With QCDs Can Benefit Both Giver and Receiver


Many retirees are happy to give back to their communities through charitable giving, but questions often arise as to the best way to do so.

Which approach is efficient, provides the desired tax benefits, and is also beneficial to the charity at the recipient?

One way is through a qualified charitable distribution (QCD), a tax-conscious way to reduce your taxable income and maximize your giving, whether or not you file deductions on your tax returns. An added bonus is that the benefits can be great for both the donor and the charity.

This is how QCDs work

A QCD is a distribution from an IRA that is paid directly from that retirement account to a qualifying charity. QCDs lower your Adjusted Gross Income (AGI) and therefore your tax burden. You can also balance required minimum distributions (RMDs), the withdrawals you need to make from your IRA each year once you reach age 72. An RMD increases your income and increases the taxes you pay, but a QCD is excluded from your income. For example, if you withdraw $50,000 from your IRA as RMD, you would pay tax on that money. But when that same $50,000 was used as QCD instead, you avoid the taxes while helping a charity.

Taxpayers can benefit from QCDs even if they take the standard deduction and don’t itemize their deductions. Although a QCD does not count as a single deduction, taxpayers who make a single deduction still benefit because an exclusion is better than a single deduction because it lowers their AGI. AGI is an important number on your tax return because many tax benefits, deductions, credits, and other additional taxes or duties are based on AGI. A lower AGI can reduce income tax on Social Security benefits and reduce Medicare surcharges. There may be other benefits as well.

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Some rules to follow

There are important rules governing how QCDs work, including:

  • The charity you donate to must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions. Donor-Recommended Funds, Supporting Organizations (ie, organizations that donate to other public charities), and Private Foundations are not Qualified Charities.
  • The donor may not receive any benefit for distribution to the charity. For example, the donor may not receive tickets to a charity event, buy tickets for a raffle, or buy something at a charity auction.
  • There is an age requirement. The donor must be over 70½ years of age and can do QCDs before RMDs are required, which is the case from age 72 and up.
  • The maximum annual QCD is $100,000 per person, not per IRA. A husband and wife can each earn up to $100,000 QCD if the money comes from their own IRA.
  • The QCD must be a direct transfer from the IRA to the charity. Preferably, the IRA administrator would write the check. It is not permissible for the IRA administrator to pay the IRA owner and then have the owner write a personal check to the charity.
  • QCDs are available from IRAs and Inherited IRAs. QCDs can also be created by SEP IRAs and SIMPLE IRAs, but only when those IRAs are inactive, meaning the SEP or SIMPLE IRA owner is no longer contributing to those accounts. Additionally, only pre-tax IRA funds qualify. As a result, most Roth IRA funds do not qualify because your contributions to them were not pre-tax. Also, QCDs cannot be created from employer plans such as 401(k).
  • Taxpayers should inform their tax preparer that they have prepared a QCD, as the 1099 issued by the custodian does not state a QCD; it only shows that a distribution was made by the IRA. If the QCD is not referenced in the tax return, the taxpayer loses the tax benefit.
  • A required minimum distribution may be offset by a QCD (up to $100,000 USD). However, in this case, the timing of a QCD is important. The first dollars withdrawn from an IRA each year count towards the RMD. You cannot retrospectively claim that money already distributed by an IRA was actually QCD funds. In other words, once an RMD has been taken, that income cannot be offset against any future QCD. It is therefore generally recommended to do QCDs early in the year, especially if IRA distributions are monthly or quarterly.
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What the tax savings might look like

A qualified charitable distribution can be a powerful tax saving tool for those who qualify and ensure they comply with the rules.

However, as you can see, making sure everything is done right can get complicated. Therefore, it is best to find a financial professional who can help you work through these rules and get everything right.

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Example of potential QCD savings

A table shows that donating $20,000 to a QCD could save a 71-year-old couple $4,400 in federal taxes.

Ronnie Blair contributed to this article.

Securities and advisory services provided by Sunbelt Securities, Inc. Member FINRA / SIPC. Fixed Life Insurance and Annuities offered by Charles W. Rawl & Associates, LLC. Charles W. Rawl & Associates, LLC and Sunbelt Securities, Inc. are not affiliated companies and do not provide tax or legal advice.

President, Charles W. Rawl and staff

As President of Charles W. Rawl & Associates, LLC (www.cwrawl.com), Charlie Rawl excelled as a troubleshooter, implementing creative solutions to complex financial problems. He has passed series 6, 7, 31, 63 and 65 securities exams and holds life insurance licenses in more than a dozen states.

The appearances at Kiplinger were achieved through a public relations program. The columnist was assisted by a public relations firm in preparing this article for submission to Kiplinger.com. Kiplinger was not compensated in any way.





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