If you are age 70.5 or older, and subject to annual Required Minimum Distributions (RMD) from an IRA, a qualified Charitable Distribution (QCD) may be a valuable tax-saving strategy for you to consider.
A QCD is a tax-free distribution from an IRA directly to a qualified charitable organization. QCDs also count towards an individual’s annual RMD. With the passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015, Congress made permanent this ability to make QCDs.
Requirements for Qualified Charitable Distributions:
1. Individual must be 70 ½ or order on the date of the distribution
2. Limit of $100,000 per individual per year
3. Must go to a public charity (not a private foundation or donor-advised fund)
4. Distribution must come from an Individual IRA (not a SEP, Simple IRA, or employer retirement plan)
5. Check must be made payable directly to the qualifying organization
Rather than making a taxable distribution followed by a charitable contribution, a QCD allows the distributions to go directly to the charity (thus no income and no deduction). Although on the surface this may seem to be the same, a QCD may be more beneficial than a typical distribution followed by a charitable contribution. A typical charitable distribution reduces taxable income, however it does not reduce Adjusted Gross Income on which many taxes and Social Security calculations are based. With a QCD, no income is counted at all.
Potential Benefits of a QCD:
1. Reduces taxes for individuals who take the standard deduction (not enough itemized deductions to benefit from charitable contributions).
2. Reduces taxes on Social Security income.
3. Helps avoid the Alternative Minimum Tax (AMT).
4. Reduces 3.8% Medicare surtax for high income earners.
5. Reduces Medicare Part B surcharge.
6. State of Ohio Income Tax benefit since Ohio does not recognize charitable deductions.
As you can see there are many benefits to using a Qualified Charitable Distribution with minimal tax disadvantages. As a helpful hint, a QCD will need to be received by the qualifying charity in the year it was distributed so don’t want until the very end of the year. Talk to your advisor about whether a QCD is right for your specific financial situation.