Save Tax Money with Your Qualified Charitable Distributions
: How to Lower Your Adjusted Gross Income – and Your Tax Burden
What is a QCD and How Does it Affect the RMD?
The RMD is the minimum amount that must be withdrawn from a retirement account starting April 1 after the account holder turns seventy-two (or 70 ½ for anyone born before July 1, 1949). The amount withdrawn is a combination of account value divided by a number that corresponds to your age. If you fail to make your RMD, the money is taxed at the excruciatingly high rate of 50 percent.
The QCD is a charitable distribution you can make directly from a traditional IRA. This charitable dispersion counts toward your RMD while allowing you to benefit a cause or organization that is meaningful to you in the process.
How Does This Save You Money?
When you withdraw funds from your IRA and utilize a QCD to donate them to a qualified charitable organization, it satisfies your RMD and is a dispersal that doesn’t count toward your Adjusted Gross Income for the year.
Since the QCD is lowering what your Adjusted Gross Income would have been if it included the RMD, you may be adjusting which tax bracket you will fall into for the year. In the long run, lowering your taxable income for the year is a greater deduction to taxes than claiming the same amount of money as a standard charitable deduction.
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Using the Qualified Charitable Distribution
Seniors looking to reduce their tax burdens can easily benefit from the QCD and avoid being in higher income tax brackets and paying additional taxes on money they don’t need. Pick a qualified 501(c)(3) organization you’d like to donate to and instruct your IRA custodian to donate as much of your RMD as you’d like to the organization.
Easy QCD Rules
QCDs are straight-forward and easy to handle. Here are some of the rules and regulations related to the distributions:
- You must be 70 ½ years old to begin using QCDs.
- For the distribution to count toward your RMD, the money needs to be distributed before the RMD deadline. In most cases, the deadline will be before the end of the tax year.
- You can make one large contribution or many smaller distributions, but the maximum amount you can distribute annually as a QCD is $100,000.
- Your QCD cannot be greater than the total amount of your adjusted gross income for the year. Ostensibly, you cannot donate more than you make for the year.
- The maximum amount you can deduct from your Adjusted Gross Income with the QCD is affected by contributing to your IRA. Consider the advantages and disadvantages of this beforehand.
- Qualified Charitable Distributions are made from traditional IRAs. They cannot be made from 401(k)s, 403(b)s, SIMPLE, or SEP IRAs.
The Changing Landscape of 2020 and Beyond
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed by Congress in March of 2020, created many changes to the laws governing financial funds. One way it affects QCDs is that it waived the RMD from retirement accounts for 2020. As of now, it appears the RMD waiver will not be extended into 2021.
Despite RMDs being waived for 2020, if you used a QCD in 2020 you will still receive the same benefits as before.
Who is Eligible to Receive the Qualified Charitable Distribution?
To properly apply the benefits of the QCD to your year-end taxes, you’ll want to make sure you follow the guidelines set out by the IRS on what is considered a qualified charity. You can find their complete list here.
Qualifying charities include:
- State or federal possessions if made for public use;
- A community chest, corporation, trust, fund, etc. created in the United States and operated exclusively for charitable, religious, educational, scientific, or literary purposes or the prevention of cruelty to children or animals;
- Religious organizations;
- Organizations for war veterans;
- Nonprofit volunteer fire departments;
- Civil defense organizations created under federal, state, or local law;
- Domestic fraternal societies (the funds must be used for charitable purposes);
- Nonprofit cemeteries.
Can Couples Max Out Their QCDs?
The good news is couples can both max out their QCDs. While it's true the maximum available for a QCD is $100,000, if each spouse has their own IRA, they can each donate the maximum amount. That means a couple could lower their gross adjusted income by $200,000 for the year.
The Fine Print
There is no tax burden with a QCD from state or federal sources if the distribution is allocated to a qualified charity. The QCD is reported on your taxes using the standard 1099-R form.
Because the QCD isn't itemized, it won't be affected by the itemized deduction limitations put in place by the Tax Cuts and Jobs Act of 2017. You will still benefit from the higher deductions, and you will be able to distribute your charitable funds without being taxed on them.
Even though the distribution is handled differently than a standard donation, be sure to have a receipt or letter of donation on file as part of the paperwork package for your taxes.
Final Thoughts on Saving Tax Money with Qualified Charitable Distributions
QCDs are a great way to contribute money to the causes you believe in while lowering your income tax burden at the same time. If you’re unsure whether this is the right strategy for you, be sure to consult a tax professional before taking action.