Qualified Charitable Distributions Can Reduce Taxes
Using an old adage “you can have your cake and eat it too,” there are several ways whereby contributions to charity might also reduce your tax burden while benefiting causes you support. One of these is a Qualified Charitable Distribution sometimes referenced as a QCD.
QCD’s can use the federal tax code to benefit taxpayers, mostly in the upper income brackets, who are older and must take Required Minimum Distributions (RMD’s). Explaining RMD’s and who they affect has become somewhat more complicated recently with the passage of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) which went into effect on December 20, 2019. Here is how this works and how QCD’s might help.
If you hold one or more traditional (not Roth) Individual Retirement Accounts (IRA’s) or similar tax qualified funds (such as SEP IRA, SIMPLE IRA or 401(k) or 403(b)), you reach a point when you are required by the federal government to begin to withdraw money in specified amounts (the RMD) from the account. If you reached the age of 70 ½ in 2019 or earlier for IRA’s you must take your first RMD by April 1, 2020. If you reach age 70 ½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72.
Taking the RMD adds these funds to your taxable income which can have the unwelcome effect of potentially pushing you into a higher income tax bracket. It might also limit or eliminate some types of tax deductions such as personal exemption and itemized deductions and sometimes trigger higher taxes on Social Security income. So, even if you do not want or need the distribution from the account, you are required to take it and count it in your income. There is a substantial penalty if you do not do so.
A QCD is one way a charitable contribution can help. Here is how.
A qualified charitable distribution can allow individuals who are required to take RMD’s to donate up to $100,000 total to one or more charities directly from a taxable IRA without the funds being counted as part of their income. Because QCD’s do not increase taxable income, high tax rates, phaseouts, and other unpleasant effects of receiving the RMD’s into income can be avoided or reduced in effect. See https://www.fidelitycharitable.org/guidance/philanthropy/qualified-charitable-distribution.html
Since the QCD also reduces the overall balance in the IRA, it also potentially can decrease the RMD required to be taken in subsequent years. QCD’s are not counted toward the maximum amount deductible as charitable deductions for those who itemize on their tax returns and might allow more charitable gifting. Funds are transferred directly to the charity and not through the IRA owner.
As can be imagined, actions taken need to be taken with professional advice to assure you comply with all the requirements. Here are some questions.
When do you need to complete the QCD? If you want to make a QCD count toward your minimum annual IRA distribution it must be made by December 31 of the tax year in question.
What kind of charitable contributions count? Not all charitable contributions necessarily count. As reported by www.fidelitycharitable.org, “Currently, QCD’s cannot be made to donor-advised fund sponsors, private foundations and supporting organizations, though these are categorized as charities…” The site then states “NOTE: Donors should check before making a gift to ensure the organization is qualified to accept QCDs…” In other words do not attempt to do this without further investigation or without the support of professionals who know what they are doing.
Is a QCD always the best answer? There are many alternatives for charitable giving that could apply in a given case. For instance, as the article cited indicated, if you prefer to take a tax deduction in the current year and then decide on the specific charities later, a donor-advised fund might make more sense. Alternatively, you might decide to donate highly appreciated assets directly.
What kind of charities might benefit by a QCD? You might check with your church as one possibility or any number of worthy 501(c) (3) charities. Just make sure they qualify (see above) and that it is the best choice of charitable giving for you. Again, consult with your CPA or financial advisor who is familiar with the process.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.