How to Save on Taxes With Qualified Charitable Distributions

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Qualified charitable distributions (QCDs) are not only a way to help great causes and those in need, but they also are a way to manage your tax exposure and avoid unpleasant surprises.

For people who are at least 70 ½, and who don’t need income (or who simply want to avoid the income tax) from their required minimum distributions (RMD), QCDs are a nice tool to have in your retirement toolbox.

What Is a Qualified Charitable Distribution (QCD)?

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A qualified charitable distribution (QCD) is a distribution from your IRA, that goes directly from your plan’s custodian to a qualified charity.

Qualified charitable distributions can be paid to satisfy the required minimum distribution (RMD) rule that starts at age 72 for traditional IRAs. And, the money distributed does not count to your adjusted gross income (AGI) as it does with a regular distribution.

How Can a Qualified Charitable Distribution Save You Tax Money?

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Qualified charitable distributions from your traditional IRA are a way to take your RMD without having to report it as income — and paying the requisite taxes.

So, QCDs reduce your adjusted gross income (AGI), which generally provides a greater tax benefit than claiming the charitable contribution as a tax deduction (and you don’t need to itemize).

How Does a Qualified Charitable Distribution (QCD) Work?

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QCDs are a way to reduce the tax burden of an RMD for seniors who don’t need the money as income and want to avoid being pushed into paying more taxes or a higher tax bracket.

You make a QCD by instructing your IRA custodian to pay part or all of your RMD to a qualified 501(c)(3) charity.

What Are the Rules for QCDs?

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The rules for QCDs aren’t very complicated, but there are some:

  • To make a qualified charitable distribution you have to be 70 ½ or older.
  • For a QCD to count towards your current year’s RMD, the funds must come out of your IRA by your RMD deadline. For most folks that’s December 31.
  • The maximum annual amount that can qualify for a QCD is $100,000. That goes for one big contribution or many smaller contributions — the total yearly max is $100,000.
  • Your QCD can’t exceed the amount of your money that would otherwise be taxed as ordinary income. That means you can’t donate more than what you owe in taxes and qualify for a tax refund.
  • If you are also thinking of contributing to an IRA, that contribution may reduce the amount of the QCD you can deduct.
  • Anyone with a traditional IRA who is 70 ½ or older than can make a QCD. However, QCD rules only apply to IRAs — they do not apply to 401(k)s, 403(b)s, SIMPLE IRAs, or SEP IRAs.

Can You Make QCDs in 2020?

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Good question! You may know that in March of 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act that waived RMDs from retirement accounts for 2020. (You still need to take an RMD in 2021 unless Congress updates the CARES Act.)

Fortunately, if you wish, you can still make a QCD in 2020. While the requirement for RMDs has been waived, your QCD still offers the same tax benefits if you choose to do one.

Who Can Receive Qualified Charitable Distributions?

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For tax purposes, qualified charities are defined by the IRS. This is their list of the types of organizations that qualify as qualified charities:

  • A community chest, corporation, trust, fund, or foundation
  • A church, synagogue, or other religious organization
  • War veterans’ organizations
  • Nonprofit volunteer fire companies
  • A civil defense organization created under federal, state, or local law
  • A domestic fraternal society that operates as a lodge (but only if the contribution is to be used exclusively for charitable purposes)
  • A nonprofit cemetery (but only if the funds go to take care of the cemetery as a whole and not a particular grave)

Donations to states or the federal government are also considered charitable contributions if the donation is made strictly for public purposes.

The IRS has a handy tool that lets you look up a charitable organization to see if it is registered and can accept donations.

Can Couples Both Max Out Their QCDs?

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QCDs are capped at $100,000 per person, per year. For a married couple where each spouse has their own IRA, each spouse can contribute up to $100,000 from their own account.

So, if you are married, each spouse can contribute up to $100,000 from their own IRAs for a big donation of $200,000.

What Are the Taxes on QCDs?

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Unlike the distributions from your traditional IRA, there is no federal or state withholding tax on distributions made to qualified charities.

You report your charitable gift as a normal distribution on your taxes using IRS Form 1099-R. (This only works for IRAs you did not inherit. If you are making a distribution from an inherited IRA or an inherited Roth IRA, your charitable distribution is reported as a death distribution.)

Another great thing about QCDs is you don’t have to itemize your tax return to benefit from one. That means you can take advantage of the higher standard tax deduction passed in the 2017 Tax Cuts and Jobs Act and still use your QCD for charitable giving.

Of course, the IRS won’t let you double dip. Though your QCD amount is not taxed, you can’t also claim the distribution as a charitable tax deduction.

One final word of advice: When you make a QCD, be sure to get the same type of acknowledgment of the donation (a letter or receipt) that you would normally get to claim a charitable contribution deduction on your taxes.

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