After the recent tax law change, many taxpayers are no longer are able to itemize certain tax deductions due to the higher standard deductions. However, for senior taxpayers who are charitably inclined and make regular donations, QCDs (Qualified Charitable Distributions) can be of great tax advantage to them.
People who are 70 ½ or older, are eligible to make a transfer of funds directly from their IRA to a qualified charity. In addition to the benefit of giving to charity, a QCD also excludes the amount donated from their taxable income. By excluding the Required Minimum Distributions (“RMD”) from income, in effect, you get an “above the line” tax deduction.
There are certain conditions that must be met in order to take the benefit and qualify for such arrangement:
- The age requirement – 70 ½ or older.
- Limited to the amount of required minimum distributions. Any amount over the RMDs does not count toward a future year’s RMD.
- The maximum annual amount that can qualify for QCD cannot exceed $100,000 per person. This applies to the sum of one or more charities in a calendar year. If your spouse also has an IRA, then the total annual amount becomes $200,000.
- The funds must come out directly from the IRA by the RMD deadline which is generally 12/31 of the year. The funds that are distributed to you and then donated, do NOT qualify as QCDs.
- The charity must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions. Private foundations, supporting organizations, and donor advised funds are not eligible.
- The account types that are eligible for QCDs include – Traditional IRAs, Inherited IRAs, inactive SEP, and SIMPLE IRAs.
The tax reporting for QCDs is made on form 1099-R as a regular distribution for a regular IRA and a death distribution for an inherited IRA. CAUTION: as support for this QCD donation, you still need to obtain and retain the acknowledgment receipt of the donation for your records.
QCDs could be a very smart move from a tax planning point of view for individuals over 70 ½ years old. Please consult your tax advisor at Wegner CPAs to learn more about this tax-saving strategy.