Qualified Charitable Distributions

Navigating the tax code to identify tax planning opportunities is tricky for the average joe. Even Albert Einstein said, “The hardest thing to understand in the world is the income tax.” With tax season wrapping up you might be reviewing your return wondering if there are any opportunities to generate more tax savings going forward. For the charitably inclined, you might be interested to learn more about utilizing a qualified charitable distribution to reduce your taxable income and meet your philanthropic gifting goals.

What is a Required Minimum Distribution?

First, let’s talk about what a required minimum distribution is. Once you hit age 72, the IRS requires you to start taking funds from your IRA called a Required Minimum Distribution (RMD). You must pull this RMD from your IRA on an annual basis starting at age 72 regardless of if you need the funds to supplement cash flow, and the distributed dollars are taxable to you as ordinary income. The additional taxable income has the potential to push you into the next marginal bracket, which can be frustrating if you do not need those funds for day-to-day expenses. For individuals that are charitably inclined, one strategy to consider is utilizing a qualified charitable distribution.

What is a qualified charitable distribution and how does it work?

A qualified charitable distribution (QCD) is when you make a distribution directly from your IRA to a charitable organization. Distributions made in this fashion are not considered taxable income, help you satisfy the required minimum distribution, and provide funds to charity. Please note this must be a direct distribution from your IRA to the qualified charity - you cannot put the distribution into your bank account and then write a check to the charity.

To qualify the charity must be an eligible church or 501(c)3 organization. It is important to note that donor advised funds, private foundations, or charitable gift annuities do not qualify as eligible recipients. If you regularly give to a charity and want to check their eligibility, you can utilize the IRS tax-exempt search link below:

https://apps.irs.gov/app/eos/

Earlier we mentioned that it is important to know what a required minimum distribution is to understand one of the benefits with this strategy. As a reminder, once you turn 72 years old the IRS will require you to satisfy a required distribution amount. Commonly this is sent as a check to the account holder, to a bank account, or to a taxable investment account, which fulfills the minimum distribution requirement but also triggers ordinary income tax on the distributed funds. Instead, you can send either a portion or the full RMD directly to a qualified charity(s) and the proceeds are not taxable.

In the past, if you were looking for some tax incentives with charitable donations it required you to itemize when tax filing so you could get a charitable deduction. With the current high standard deduction limits of $12,950 (single) and $25,900 (married filing joint), you must give more than those limits to charity for itemizing to be beneficial. Instead, with a QCD you do not get a charitable deduction, but the entire distribution sent to the charity is not included in your taxable income. So, this allows you to still meet your charitable giving goals while not having to pay ordinary income tax on the minimum distribution the IRS requires you to draw.

Here are nine quick reminders about QCDs, how they work, and how they might be beneficial to you as we finish out the year. 

The annual QCD cap is $100,000 per person ($200,000 MFJ).

You become eligible to make a QCD at age 70.5, but it will not start counting toward your RMD limit until age 72.

Beneficiary IRA owners can also do a QCD but must be at least 70.5 years old to qualify

SEP IRA and SIMPLE IRA accounts are eligible to make QCDs but only if there were no employer contributions made for the plan year in which the QCD is made.

Employer qualified retirement plans (401k, 403b, profit sharing plan, etc.) are not eligible to make a QCD under any circumstance.

A QCD is not reported as such on the 1099-R. There is no code or box on that form that says “QCD”. Get a gift receipt from the charity or confirmation from your advisor. On the 1040, the total amount of IRA distributions you made this year (including your QCD) goes on line 4a. The taxable portion of the IRA distribution (anything other than the QCD) goes on line 4b and you or your tax preparer should write “QCD” next to line 4b so your CPA will know to file it correctly.

Non-deductible IRA contributions and after-tax rollover funds are not eligible to be a QCD.  It must come from pre-tax dollars (IRAs are typically funded with pre-tax dollars, but not always – consult your advisor for details). 

The first dollar you take out of an IRA in any year is considered part of your taxable RMD unless it is a QCD. If you take a withdrawal from your IRA in February, place the funds into your bank account, and then in November complete a qualified charitable distribution, then the February withdrawal is considered taxable income.  If the February withdrawal was not enough to satisfy your required minimum distribution for the year but the QCD was enough to cover the difference, you do not have to make any further IRA distributions this year.  But you still must pay taxes on the amount withdrawn in February.  

Qualified charitable distributions can be valuable to high-income retirees, potentially keeping them away from limits to itemized deductions, the 3.8% Medicare ACA surtax, or increased Medicare premiums. But QCDs can also be valuable to retirees who are not in the top tax bracket since you cannot get a tax deduction for specific charitable donations if you don’t itemize your deductions. 

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

 

Get the latest posts from BentOak Capital

Keep updated on how the latest financial trends impact you!

More about the author: BentOak Capital Team
tree

Please remember to contact BentOak Capital ("BentOak"), in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct that BentOak to effect any specific transactions for your account. A copy of our current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.bentoakcapital.com.

BentOak Capital is a registered investment adviser with offices located in Weatherford, Fort Worth, and Lubbock Texas. BentOak Capital may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. BentOak Capital’s website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of BentOak Capitals’ website on the Internet should not be construed by any consumer and/or prospective client as BentOak Capitals’ solicitation to effect or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet. Any subsequent, direct communication by BentOak Capital with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of BentOak Capital, please contact the state securities regulators for those states in which BentOak Capital maintains a registration filing. A copy of BentOak Capital’s current written disclosure statement discussing BentOak Capital’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from BentOak Capital upon written request. BentOak Capital does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BentOak Capital’s website or incorporated herein and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

This website and information are provided for guidance and information purposes only. The content is developed from sources believed to be providing accurate information. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy regarding your individual situation. This website and information are not intended to provide investment, tax, or legal advice.

Insurance products and services are offered and sold by individually licensed and appointed insurance agents.

Securities offered through LPL Financial, Member FINRA / SIPC. Investment advice offered through BentOak Capital, a registered investment advisor, and separate entity from LPL Financial. The LPL Financial representatives associated with the website may discuss and/or transact securities business only with residents of states in which they are properly licensed. No offers may be made or accepted from any resident outside of the following states: AK, AL, AR, AZ, CA, CO, CT, DE, FL, GA, HI, KS, KY, LA, ME, MO, NC, NJ, NM, OH, OK, PA, TN, TX, VA, WA.