Did you know that you can donate up to $100,000 to a qualified charity (or charities) from your IRA beginning at age 70½? This is called a Qualified Charitable Distribution (QCD), and if done correctly, can allow you to donate to charities you care about while potentially lowering your tax bill.
Why would I want to make a Qualified Charitable Distribution?
You may already be donating to charities you care about directly, so why would you want to make a QCD from your IRA?
- A QCD lowers the amount of the taxpayer’s Required Minimum Distribution (RMD) that is taxed. As a refresher, the RMD is the amount that taxpayers must withdrawal annually from their traditional IRA beginning at age 72*. Normally, taxpayers are taxed on the full amount of the distribution. For taxpayers who do not need all or some of their RMD for living expenses, the amount of the QCD they take is subtracted from the total IRA distributions for the year, effectively lowering a taxpayer’s adjusted gross income (AGI). For example, Barbara is 74 and her RMD for this year is $50,000. She only needs to pull $30,000 from her IRA to supplement her social security and pension. She decides to donate $20,000 to her favorite charity as a QCD. As a result, only the $30,000 is included in Barbara’s taxable income.
- A QCD allows you to lower your taxable income even if you don’t itemize. When the Tax Cuts and Jobs Act of 2017 increased the standard deduction, many taxpayers found that it no longer made sense to itemize and were therefore unable to take charitable deductions. A QCD is not an itemized deduction, but rather an exclusion used to lower the amount that would be taxed from the taxpayer’s RMD. For example, Richard, age 76, and his wife Marge file their taxes jointly and take the standard deduction because it is higher than their itemized deduction would have been. Richard’s RMD for the year is $10,000; however, Richard and Marge do not need the money for living expenses, so Richard decides to make a QCD of the entire amount to a charity that they have supported over the years. The $10,000 will not be included in Richard and Marge’s AGI and therefore they are not taxed on it; however, because they did not itemize, they would not been able to take a charitable deduction for their donation.
- A QCD may lower a taxpayer’s RMD in future years. The RMD is calculated based on the IRA’s prior year balance on December 31 divided by the taxpayer’s life expectancy (from an IRS-provided table). Taking a QCD this year will lower the IRA’s year-end balance, and as a result lower next year’s RMD. For example, Phyllis turns 70½ in November of this year. She passionate about a number of charities in her community and has always been a prudent saver and investor. She doesn’t need to pull from her IRA to cover living expenses. Because Phyllis hasn’t turned 72 yet, she does not have a required minimum distribution, but she is concerned that her RMD will be high in the future due to her IRA’s large balance. She decides to use the maximum QCD of $100,000 to donate to charities that she supports. She plans to do the same next year as she still will not have turned 72. Although this accomplishes her goal of lowering her IRA balance, she is not able to carry these distributions forward to future tax years to cover future RMDs.
What should I be aware of if I decide to make a QCD?
- As with any tax-related decision, be sure to consult with your tax professional to see if a QCD is right for you.
- Contact the company that holds your IRA to help initiate a QCD properly.
- Verify that the charity or charities that you are donating to are qualified 503(c)(3) charities.
- Keep records of the donation date, amount, and receiving charity.
- Ensure that the charity provides documentation stating that it received no goods or services in exchange for the contribution.
- Be aware that you may use a QCD to lower your taxable income or itemize the charitable deduction, but not both.
*Taxpayers who turned 70½ before January 1, 2020 were required to begin taking RMDs at 70½.
Lynne Chadwick is an Assistant Vice President with Beratung Advisors. She is a former Sojourner House Board President and a Pearl of Hope Award recipient.