I believe that we are called to be stewards of our money and be generous to those around us. If you, like me, have a desire to give back, then I have great news for you. You may be able to save money on taxes with your charitable giving even if you don’t itemize deductions through qualified charitable distributions (QCDs).
Eligibility For Qualified Charitable Distributions
Now, I said “may” because not everyone is eligible for QCDs. First of all, you have to have an eligible IRA:
- Traditional IRA
- Rollover IRA
- Inherited IRA
- Inactive SEP IRA
- Inactive SIMPLE IRA
To be considered inactive, an account must not have received any employer contributions during the plan year that ends during the tax year that the QCD is made. Roth IRAs are not eligible for QCDs because you never have to pay taxes on your distributions from them in the first place.
Even if you have an eligible account, there are still some other criteria that must be met to make a QCD:
- You must be age 70½ or older.
- Funds must be distributed directly to the charity.
- The charitable donation cannot be made in exchange for a charitable gift annuity.
- Total QCDs cannot be greater than $100,000 per taxpayer each calendar year, regardless of the number of charities donated to.
- QCDs cannot exceed the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
How Qualified Charitable Distributions Work
A QCD is basically where instead of having your IRA send you a check, they send it directly to the charity of your choice. To be eligible, it must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions. Also, it cannot be a private foundation, charitable remainder trust, supporting organization (a charity that exists to support other exempt organizations), or a donor-advised fund managed by a public charity on behalf of individuals, families, or organizations.
When the check goes directly to the charitable organization, the amount is never included in your taxable income. It must go directly to the organization, though, because if you take a distribution and then give it to charity, it does not count as a QCD and will be included in your income.
Benefits Of Qualified Charitable Distributions
QCDs can benefit you in a number of ways. Because they never appear on your tax return, they lower your taxable income. This means that you will have a lower tax bill. Having a lower taxable income helps you in other ways as well. You may be eligible for more tax credits and deductions. Medicare costs can also be affected by taxable income as well as the taxability of your Social Security benefits.
One of the biggest benefits of QCDs is that they can count toward your required minimum distributions (RMDs). Upon turning 70½, by law you have to start removing money from your IRA (taking RMDs) or you will be penalized. You can use a qualified charitable distribution to help fulfill your required RMD.
In order to count toward your RMD, the funds must come out of your IRA account by December 31 (or April 1 of the year after you turn 70½). Distributions only count for the year in which they are made. Excess donations cannot be carried forward to count toward future-year RMDs.
Qualified charitable distributions are a great way to fulfill your RMD obligation without raising your tax liability. For example, if your RMD is $25,000 this year, you could transfer $10,000 directly to charity tax-free through a QCD. That way, you would only have to withdraw and pay taxes on $15,000 and still satisfy your RMD.
With the higher standard deduction this year, fewer people will be itemizing their deductions. Without itemizing, many people will not receive any tax benefit from their charitable giving. However, with a QCD, you get an immediate tax benefit, regardless of how you file your taxes. So, you can both take the standard deduction and receive a tax benefit from giving, an opportunity few Americans have.
How I Can Help
While QCDs are a great benefit for generous seniors, they are also complicated. Eligibility requirements and deadlines can be a lot to keep track of, so it is wise to work with an experienced financial professional.
If you would like to explore the option of using qualified charitable distributions to give back, or if you just have more questions, call us at ClearVista Financial at 800-491-4508 or email firstname.lastname@example.org. Together, we can figure out the wisest way to steward the money that God has entrusted to you.
About ClearVista Financial
ClearVista Financial is a faith-based independent financial services firm providing financial planning and retirement planning to pre-retirees and 401(k) plan participants. Founded by Mark Trice, ClearVista strives to help people find financial balance in their lives and spend their lives well. As a Certified Kingdom Advisor (CKA®) advisor, Mark provides professional guidance while also incorporating biblically-based financial management truths into ClearVista’s financial advisory practice. ClearVista Financial has offices in Austin, Brownwood, Temple, Houston, and Waco, Texas. Along with serving clients in Texas, the team also works with individuals in Arizona, California, Colorado, Missouri, West Virginia, and Virginia. To learn more, visit www.clearvistafinancial.com or connect with us on LinkedIn.