A Tax Savvy Tip for Gifting to Charities

With the changes to the tax code in the 2017 Tax Cuts and Jobs Act, many people who previously were able to take advantage of the charitable deduction through itemizing find that they no longer can do so.  However, for clients who are over age 70 ½ there is a still a tax advantaged method for gifting without having to itemize while simultaneously counting towards required minimum distributions.  It does require some planning and coordination and should ideally be considered early in the year to ensure the full benefit.  The Qualified Charitable Distribution strategy provides a “work-around” that still allows clients to receive a tax benefit for charitable donations without having to clear the $25,900 (married filing jointly, $12,950 for single persons in 2022) standard deduction hurdle.  QCD’s have been around for a while but are increasingly popular given the new tax code.  Here are some of key features:

What is a qualified charitable distribution?

A QCD is a tax advantaged method of donating money to charity. It allows certain taxpayers to make a charitable cash donation directly from their IRA to the charity and exclude the distributed amount from their adjusted gross income. Amounts distributed using a QCD count towards required minimum distributions.

Who is eligible to use this strategy?

To be eligible for a QCD you must be over age 70 ½ and be an IRA owner. Qualifying IRAs include: Traditional IRAs, Roths, Rollovers, Beneficiary (Inherited) IRAs, and inactive SEPs and SIMPLEs. Distributions from qualified plans such as 401(k)s or 403(b)s are not eligible.

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Why is this strategy so advantageous?

Individuals over age 70 ½ are required to take distributions from all IRA’s except Roths. The entire amount of the RMD is included in adjusted gross income- increasing the taxes owed. Furthermore, the RMD could raise income to a level that subjects you to a higher marginal tax bracket, reduces deductions or subjects you to certain phaseouts. By using a QCD strategy instead and gifting the money directly to charity, the amount of the QCD will not be included in adjusted gross income, thereby reducing taxes and counting towards your required minimum distributions.

Why may I need to consider this early in the year? 

Many people take their RMD monthly throughout the year.  If you are interested in using the QDC strategy and you take monthly distributions to satisfy your RMD, you should consider this strategy early in the year before distributions have been made.

qualified charitable distribution

What types of charities can I donate to?

Most public and private charities are eligible to receive QCDs. Donor advised funds, supporting organizations, and private foundations are specifically excluded.

Does the entire donation need to go to one charity?

No, you can make as many QCDs to as many charities as you wish.

Is there a limit to the amount of money I can donate with a QCD?

The maximum annual amount that can be excluded from income is $100,000. If you are married and file taxes jointly, your spouse can also make a QCD of up to $100,000.

If I donate an amount larger than my RMD amount, will that count towards satisfying future years’ RMDs?

No. Amounts distributed to charities only count towards satisfying the current year’s RMD.

What can I do if I wish to make a QCD from a 401(k) or 403(b)?

If you rollover 401(k) or 403(b) funds to a rollover IRA, you will be eligible to make a QCD.

Do I need to gift shares of stock or cash?

The QDC is a cash donation which makes it very easy for charities to accept. Be sure to get a receipt from the charity acknowledging your donation for your tax records.

How will the Qualified Charitable Distribution be reflected on my 1099R?

QCD’s look like a normal (taxable) distribution so you will need to let your accountant know that this was a gift to charity when you file your taxes.

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