By Allen Giese, CLU®, ChFC®, ChSNC®
Ah, April! Spring showers and flowers, looking ahead toward summer, Earth Day, and … taxes. Seems only fitting to write an article this month about one of my favorite tax breaks—qualified charitable distributions (QCDs)!
A discussion around QCDs starts with a discussion around required minimum distributions (RMDs) from your individual retirement accounts (IRAs). RMDs are distributions we’re all required to begin taking from our IRAs in our 70s (currently age 73 or 75, depending on your birth year).
The IRS has been looking at your IRA for a lot of years and is very excited about the prospect of you finally paying some taxes against those dollars. I imagine them over there in their IRS building cheering you on to get to 73 (or 75) so they can finally start collecting some revenue from your IRA. It’s a party over there!
But over at YOUR house, you may be thinking, “I really don’t want to take an RMD. Maybe I don’t NEED an RMD and am doing just fine without it. But if I don’t take the RMD, there’s a BIG penalty. If I TAKE an RMD (that I don’t need), it’s treated like ordinary income, and I have to pay income taxes on it. And if I take the RMD, not only do I have to pay taxes, but it INFLATES my AGI (adjusted gross income), which can mess with my medical deductions and could prevent me from taking other deductions against losses as well. It’s NOT a party over here!”
If there were only a great way to satisfy your RMD requirement without getting caught in these tax traps. In steps the QCD.
Here’s how it works:
Assume Daniel is 75 and has an RMD due this year of $25,000 from his traditional IRA.
Daniel, who is charitably inclined, decides to send $25,000 to his favorite charity this year.
That $25,000 could be a QCD, satisfying the RMD requirement of $25,000 while avoiding the 25% penalty the IRS would levy for not making the RMD.
Daniel doesn’t get the tax deduction for the charitable donation, but he does get to bypass including that $25,000 distribution in his AGI, giving him potentially multiple tax-saving benefits.
One slice of the American demographic clearly benefiting from QCDs is seniors who (1) have a traditional IRA and (2) take the standard deduction each year, which means they aren’t deducting charitable contributions. These people don’t get any tax benefit from donating to charity, so they might as well make those donations from their IRA, avoiding the taxable income from distributions.
What do you need to know about how to take a QCD? For starters, you have to be at least 70 ½ years old as of the date you transfer the money to a qualified charitable organization.
While a QCD can count as your RMD, you are not limited to your RMD amount for your QCD. If your charitable inclinations are greater than your RMD, that’s fine—go ahead and give more (up to the annual limit). The charitable organization certainly won’t mind. You can even do a QCD in those earlier years (between 70 ½ and 73 or 75) when an RMD isn’t due.
The annual limit for a QCD is $100,000 per donor. So, a couple in that age range can donate up to $100,000 each from their respective IRAs, or $200,000 total. It’s important that your IRA custodian makes the payment directly to the charity—not to you. Also make sure they include your name and address so the charitable organization can send you the required acknowledgment. This letter should state that the charitable organization received the money and did not provide you with any benefit in return.
Would you like to talk more about this? Contact your Northstar advisor today and see if a QCD should be part of your financial plan.