10 Things Anyone Considering a QCD Should Know
Givers and getters can benefit from this charitable giving tax strategy by donating their RMDs, but there are several rules that you need to follow.
Maybe you didn’t pay much attention to all the ramifications of the tax reforms that took effect in 2018. Or maybe you thought you’d wait and see how things actually played out on your tax return before you made any strategic changes.
By now, though, you probably know: Thanks to the Tax Cuts and Jobs Act’s higher standard deduction — which doubled to $12,000 for single filers and $24,000 for joint filers in 2018, and will be $12,200 and $24,400 in 2019 — fewer taxpayers are itemizing on their returns.
That might make doing taxes easier, but those who use the standard deduction miss out on several popular tax breaks, including claiming a deduction for any donations they make to a qualified charity.
Subscribe to Kiplinger’s Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Whether you’re an occasional writer of small checks to your favorite cause or a regular and generous donor, that could mean a hit to your tax bill. It also will hurt those charities’ bank accounts, if donors who were partially motivated by the tax break decide to no longer give.
Fortunately, there is a strategy that can keep both givers (at least those who are retirement age) and getters on course with charitable donations. Taxpayers age 70½ and older can use a qualified charitable distribution (QCD) to donate up to $100,000 annually directly from a traditional IRA to an eligible public charity without counting that amount as taxable income. Instead, it would count toward your required minimum distribution (RMD) and reduce the taxable amount of your mandatory withdrawal.
Using your RMD as a charitable contribution will exclude that amount from your adjusted-gross income (AGI) for the year, which means that in addition to reducing your income taxes, it also can decrease the amount of Social Security that is subject to tax and potentially lower your Medicare premiums. (You may be able to take a QCD from a Roth IRA, but there is no tax advantage.)
If this sounds like a strategy that could work for you, here are some things you need to know:
- Each person can donate the full amount of his or her RMD, up to a maximum of $100,000 annually. If you’re a married couple filing jointly and you each have your own IRA, you both can use the $100,000 QCD rule.
- You should work with your IRA custodian to correctly accomplish a QCD. Be careful not to withdraw the funds or deposit the RMD into your personal account and then write a personal check. The funds must be made payable directly from the IRA to the charity. (Some IRA custodians mail the check to the IRA owner; if that’s the case for you, simply give the check to the charity.)
- Be sure to inform your tax preparer that you did a QCD. Your IRA custodian will send you a 1099 showing that the distribution occurred, but the amount may not be clearly identified as a QCD. Be sure the QCD is correctly listed on your tax return or you’ll lose the tax break.
- It’s permissible to use less than the full RMD for the charitable distribution. So, for example, if you have an RMD of $6,000 and you want to give only $4,000 to charity, you still would need to withdraw the remaining $2,000 and pay taxes on it. (Taking the incorrect amount for your RMD could result in a hefty penalty.)
- You can make a QCD that exceeds your RMD for a given year. However, that extra distribution can’t be carried over to meet the RMDs for future years.
- You can distribute the money to multiple charities if you choose. The $100,000 per person limit applies to the sum of all QCDs taken from all your IRAs in the tax year. You can make one large contribution or several smaller contributions to one or more charities.
- Donors cannot receive any benefit for making a qualified distribution to a charity. So, for example, you can’t use a QCD to purchase something at a charity auction or tickets to a charity event.
- For a QCD to count toward your minimum annual IRA distribution, it must meet the same deadline as a normal distribution. (Usually Dec. 31.)
- Not every organization or cause qualifies for a QCD. The organization must be a 501(c)(3). A QCD can’t be made to donor-advised fund sponsors, private foundations or supporting organizations. Before you arrange for the transfer of funds, be sure the charity is eligible.
- The first dollar out of an IRA is considered to be the RMD. So, if you take money out early in the year, that distribution would count toward your RMD and you could potentially lose the tax benefit of the QCD. Say for example John, who is 75, takes his full RMD in February and deposits the funds into his bank account. In November, he wants to do a QCD. John cannot retroactively deem the February distribution to be a QCD. He must take an additional distribution if he still wishes to do a QCD for that calendar year. That income can be excluded, but it still won't offset the income from the RMD taken earlier in the year.
If you’re already 70½ but the QCD strategy is new to you, be sure to discuss your specific situation and any questions with a qualified tax professional. If you haven’t turned 70½ yet, it’s still worth having a conversation about how to prepare to take advantage of this strategy in the future.
For those who are charitably inclined and won’t be able to itemize their deductions, a QCD can be a win-win: You get to satisfy your RMD and exclude income from your AGI, and the charity or charities that are important to you will continue to benefit from your generosity.
Kim Franke-Folstad contributed to this article.
Investment advisory services offered through Virtue Capital Management, LLC (VCM), a registered investment adviser. VCM and Staton Financial Group are independent of each other. This content is for informational purposes only and does not take into account your particular investment objectives, financial situation or risk tolerance and may not be suitable for all investors. Information provided is not intended as tax or legal advice, and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Scott Staton is the founder and president of Oklahoma-based Staton Financial Group (www.statonfinancialgroup.com). He is an Investment Adviser Representative and received his Retirement Income Certified Professional designation from The American College.
New Mexico Rebate Checks Up to $1,000 Coming in June
New Mexico rebate checks will be sent soon. Here's what you should know.
By Katelyn Washington • Published
Should Graduates Spend or Save Their Gift Money? 14 Strategies to Consider
Financial experts share tips for deciding how to treat monetary gifts.
By Kiplinger Advisor Collective • Published
Retirement Planning with Life Insurance
An indexed universal life insurance policy can help you with tax mitigation and extra retirement income in addition to death benefits for your beneficiaries.
By Mike Decker • Published
Which Retirement Accounts Should You Withdraw From First?
Here’s a standard order for when you should tap which account when you’re in retirement.
By Evan T. Beach, CFP®, AWMA® • Published
Are You Worried About Running Out of Money in Retirement?
Planning that integrates income annuities can help alleviate the No. 1 fear of retirees, even in worst-case investment scenarios and when living way beyond your life expectancy.
By Jerry Golden, Investment Adviser Representative • Published
How, Like Indy, to Outrun the (Retirement) Boulder
To get to a comfortable retirement, ordinary people often fight larger forces, like the characters in Steven Spielberg movies. Here’s how you can fight those forces.
By Phil Wright, Certified Fund Specialist • Published
Beware the Retirement Hazard Zone: Those Years Right After Age 59½
The decisions you make in the four to five years right after you hit that pivotal age can have a big impact on the rest of your retirement.
By Chris Abeyta • Published
Cover Your Retirement Income Bases With Scenario Planning
Here are three strategies to help you plan for best- and worst-case scenarios, positioning you for retirement success.
By Chuck Bigbie, CLU, ChFC®, CFP® • Published
Six Key Housing Factors to Consider as You Age
Can you age in place, or do you need to move? And ice cream might actually have more to do with making tough housing decisions than you think.
By Thomas C. West, CLU®, ChFC®, AIF® • Published
To Create a Better Plan for Retirement Income, Start Earlier
Let’s explore how to figure out how much income your savings can generate at retirement and how to build a better plan when retirement is five or 10 years away.
By Jerry Golden, Investment Adviser Representative • Published