As we begin to wind down the year, many Americans are looking for ways to donate to charities, and their tax and financial advisors are looking for ways to lower their tax burden. IRA owners over the age of 70 ½ need to fulfill a Required Minimum Distribution by December 31. A Qualified Charitable Distribution (QCD) is an opportunity for taxpayers over the age of 70½ to make required distributions from their IRAs payable directly to a charity and to skip the taxation of the distribution all together.
Here are some key details about how it works:
-The donor/taxpayer must be over 70½ years old.
-The full distribution must go directly to the charity, not the IRA owner. The IRS will not recognize “reimbursements” for previous withdrawals as a QCD.
-No more than $100,000 can be contributed as a QCD.
-The recipient must be a public charity, not a donor-advised fund.
Review my article here for more information on how a donor-advised fund works.
Without a QCD, the donor would recognize the IRA distribution as taxable ordinary income, and then take a deduction for the contribution amount. Depending on the donor’s complete tax picture, this may or may not be the same net effect on “taxes due” for the donor/taxpayer. However, the QCD keeps the distribution from being included in the Adjusted Gross Income (AGI) box on the tax return. This can help high income taxpayers avoid the phaseout of itemized deductions, and also potentially avoid the 3.8% Medicare tax on investment income. Additionally, if you have medical or other expenses on your tax return that are subject to AGI floors, the QCD might be a good tool for you.
As with any unique tax strategy, you should consult with your tax and financial advisors to determine if it’s a good match for your situation, and, if so, how to gain the most benefit from it.
While the tax or legal information provided is based on our understanding of current laws, the information is not intended as tax or legal advice. Federal tax laws are complex and subject to change. Neither FSC Securities Corporation, nor its registered representatives, provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.