Qualified Charitable Distributions: What You Need to Know
Most American taxpayers now take the standard deduction when they file federal taxes, which means they can no longer take a deduction for charitable contributions. But some can still reap the tax benefits of giving to a qualified nonprofit organization by making a qualified charitable distribution (QCD).
QCDs were first introduced as a temporary measure in 2006 and became part of the tax code in 2015. While not a deductible contribution, a QCD can still lower federal tax burden.
If you think you might be eligible for a QCD, here is what you need to know:
Eligibility is determined by age instead of how you file your federal tax returns. To be eligible for a QCD, a taxpayer must be 70 ½ years of age or older.
A QCD must be made directly from an IRA, other than a SEP or SIMPLE IRA, rather than from the individual taxpayer’s personal bank account. Only direct transfers are eligible. Noncash items such as pieces of art or cars are ineligible. Donations for which the taxpayer receives a benefit are also ineligible.
Eligible individuals can contribute up to $100,000 per year through a QCD (or $200,000 per year for married couples filing jointly who each have an IRA).
A QCD is not considered taxable income, so it reduces tax liability by lowering adjusted gross income (AGI), which can also affect Medicare premiums and the amount of tax owed on Social Security benefits.
A QCD can be used to offset the required minimum distribution (RMD). It’s a good idea to direct IRA distributions to desired organization early in the year to avoid taking unneeded taxable distributions from your IRA later.
Taxpayers who begin making QCDs before the RMD mandatory withdrawal begins at age 72 will also be able to lower future RMD payouts because the QCD reduces the total balance in their IRA.
If you would like to take advantage of the benefits of QCDs, it’s important to plan and keep good records. Determine planned charitable contributions in advance and keep track of which IRA distributions qualify for QCD status.
If you have questions about QCDs or would like more information, contact HFM today. Our professionals are well versed on the latest issues to provide our clients with professional, personalized services.