After years of “patches”, “extensions” and other temporary maneuvers, Congress has finally made Qualified Charitable IRA Distributions permanent. With the benefit of this permanence, you can now plan ahead to take advantage of the great tax planning opportunities this strategy provides.
What are Qualified Charitable IRA Distributions?
A Qualified Charitable IRA Distribution (QCD) allows people age 70½ and older to transfer up to $100,000 directly to a qualified charity tax-free. This direct transfer is not counted as a taxable IRA distribution, yet it counts toward satisfying the Required Minimum Distribution. Qualified charities include most “501C-3” nonprofit organizations such as The Red Cross or United Way, churches, and most nonprofit educational organizations such as Girl Scouts of America or Boys Scouts of America. Examples of organizations that are not qualified are private foundations, Donor Advised Funds, and political organizations.
Who Are Qualified Charitable IRA Distributions Best Suited for?
QCDs are first and foremost a charitable gift. They are best suited to IRA owners who are charitably inclined, and who are already in the mode of making contributions to charities they support. Like any charitable vehicle or strategy, the tax benefits alone are not sufficient in and of themselves. It’s the combination of the tax benefit to you and the benefit to the charity that can make QCDs very worthwhile.
Why Making Qualified Charitable IRA Distributions Can be Good Tax Planning
Unlike traditional gifts to charities, QCDs are not deductible on your tax return. Instead, the gift reduces your taxable income. What makes this more beneficial than making your gift with cash and taking the deduction on the tax return? Since you are able to take a distribution from your IRA, not have it be counted as income, and still satisfy the Required Minimum Distribution, you can lower your gross income. Lowering your gross income is beneficial, since many tax parameters are based on gross income rather than income after deductions. For instance, the portion of Social Security income that is taxed depends on the gross income.
Itemized deductions can be reduced or taken away by limits, phase outs and the Alternative Minimum Tax, whereas reducing gross income cannot be phased out or taken away. For retirees, this can make a real difference. Another benefit is that by using your IRA for your charitable giving, you can reduce its size over time and preserve your after-tax assets. This can help lower future required minimum distributions, and therefore future taxes.
Other Charitable Giving and Tax Planning Considerations
A QCD is not always the best charitable giving or tax planning strategy. For some IRA owners—especially those who depend on withdrawals from their IRA to fund living expenses—a QCD may not be the most beneficial strategy. Instead, transferring appreciated securities to the charity, or perhaps to a Donor-Advised Fund, may provide more tax benefit. And making QCDs over and above the Required Minimum Distribution amount may be more counter-productive than productive for taxes.
Please contact us to discuss whether Qualified Charitable IRA Distributions are right for you and how best to leverage charitable giving as a part of your tax planning.