As 2019 comes to an end and the holidays are fast approaching, I’m sure a lot of you are starting to think about not only your finances (and the impending holiday shopping!) but also more broadly about what’s been meaningful to you this year and what you are thankful for. The end of the year is not only a time that we tend to reflect on what’s important to us, but it’s also a good time to plan charitable giving strategies for the upcoming year. Taking the time to do this kind of legacy planning now can maximize not only the impact of your charitable gifts, but also the tax benefits you might receive from making these gifts.
A unique giving opportunity exists for couples and individuals who are 70½ years of age or over. By utilizing what’s known as a Qualified Charitable Distribution (or QCD), you can meet the requirement to take minimum distributions from your IRA and help support charitable causes you believe in.
How Qualified Charitable Distributions Can Help with RMDs
Once you reach age 70½, the IRS requires that you take what are called required minimum distributions, or RMDs, from your IRA regardless of whether you need the money or not. Since IRAs are tax-advantaged retirement accounts, the government won’t let you keep your money in them forever.
When you start taking distributions from your IRA, you’ll have to pay taxes on the withdrawals at ordinary income tax rates. This can result in extra taxes that might put a crimp in your retirement finances.
So, this is where QCDs can come into play. Using qualified charitable distributions, you can distribute up to $100,000 directly from your IRA to a qualified charity. When IRA distributions are donated in this way, they aren’t considered taxable income. This means you don’t have to pay income tax on the distributions, yet the donation still helps to satisfy the requirement for a minimum distribution.
Qualified Charitable Distributions are Now Permanent
QCDs were first introduced temporarily in 2006. Until recently, the rule allowing QCDs had to be renewed by Congress every year, which, for obvious reasons, created a certain amount of uncertainty around this particular planning topic.
But in 2015, the Protecting Americans from Tax Hikes (PATH) Act was passed, which finally made QCDs permanent. As a result, you can now incorporate QCDs into your charitable giving and tax strategies each year (unless the rules change, that is!).
More QCD Benefits
In addition to relieving some of the tax burden created by having to take RMDs, there are several other potential benefits to using QCDs. Some of these benefits include:
- Initiating a QCD from an IRA does not impact your adjusted gross income (AGI). A number of different phase-outs for certain taxes and tax breaks are based on AGI, so this is an important consideration. Additionally, fewer people are itemizing deductions, which means that they can’t always realize a tax benefit from charitable giving. So, QCDs are a great way to still reap some tax benefits from charitable contributions.
- You can bypass the rule that restricts charitable giving to a percentage of your AGI. Distributing money directly from your IRA to a charity using a QCD effectively reduces your AGI even if your contribution would have exceeded the percentage limit of AGI.
How to Make a Qualified Charitable Distribution
Ok, so this all sounds great, but how to you actually execute a QCD? There are several important criteria that must be met to initiate a QCD. For example, you must be at least 70½ years old by the end of the year when the distribution is made.
Perhaps most importantly, the QCD funds must be distributed directly from the IRA to the charity itself. Practically speaking, this means the check should be made out to the charity, not to you personally. Take note: if it’s made out to you, the distribution will be a taxable event and you’ll lose the benefits of using a QCD.
Also make sure that the organization you’re giving the money to is a qualified public charity, or in IRS parlance, a 501(c)(3) organization. It’s also advisable to get a confirmation letter from the charity stating you didn’t receive anything of value in exchange for your gift.
To initiate a QCD, simply submit a distribution form to the IRA custodian requesting that the check be made out directly to your desired charity. The check can be sent straight to the charity or to you if you prefer to deliver it to the charity yourself.
As you plan your charitable giving and tax strategies for 2020 and beyond, think about whether utilizing a Qualified Charitable Distribution might be a wise move. And be sure to speak with a financial advisor and tax professional about your specific situation in more detail.
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