Article provided by Craig S. Murphey, Senior Vice President/Investments at Stifel, member of the MDS Board of Trustees and a former MDS parent
With the Tax Cuts and Jobs Act now in effect, many individuals and families have lost the ability to fully deduct charitable donations as an itemized deduction. This was caused by the doubling of the standard deduction and the limitation of many itemized deductions that are part of this law that took effect in 2018. However, if you are over age 70 ½ and are having to take your annual Required Minimum Distribution (RMD) from your IRA or an inherited IRA, a qualified charitable distribution (QCD) could very well be the most tax-efficient way to make a charitable gift.
Eligibility and Donation Limit
IRA holders must be at least age 70½ before the distribution. In addition, beneficiaries of inherited IRAs who meet the age requirement can also take advantage of QCDs.
For those who qualify, the maximum IRA charitable distribution is limited to $100,000 per individual per tax year. Any distribution in excess of this limit will not qualify for the tax exclusion benefit and will be treated as ordinary income. The provision applies for Traditional IRAs and inherited IRAs, but does not typically apply to distributions from “active” SEP IRAs, SIMPLE IRAs, or any Qualified Plan.
What is the Benefit of a Qualified Charitable Distribution (QCD)?
Taxpayers are able to use the qualified charitable distribution to satisfy part or all of their required minimum distribution (RMD) from their tax-deferred retirement accounts. Using the QCD to satisfy part or all of an RMD can allow a taxpayer to satisfy their RMD with less of a tax impact.
For example, if an RMD was $10,000 for 2019 and a taxpayer made a $4,000 nontaxable QCD, he or she would only need to make an additional $6,000 IRA distribution to satisfy his RMD, thus reducing the taxable income from the RMD from $10,000 to $6,000.
Rather than claiming the charitable donation as an itemized deduction, the QCD reduces the taxpayer’s adjusted gross income. Why is this important? The benefit of not including the donation as income could prevent an increase in Social Security taxation, an increase in Medicare premiums, or a reduction in deductible medical expenses, which is based on a percentage of the taxpayer’s adjusted gross income.
Furthermore, many taxpayers have lost the ability to fully deduct charitable contributions as an itemized deduction. Taxpayers in this situation are able to use the QCD to make a charitable donation in a tax-favorable manner, whereas they would otherwise not be able to claim a tax deduction.
QCD Tax Reporting
Typically, the custodian of an IRA will report a QCD as a normal distribution on the 1099R tax form, while QCDs from inherited IRAs are reported as death distributions. This gives the IRS no notification that an IRA holder intended to make a tax-free distribution from the IRA to a charity. It is the responsibility of the IRA holder or his or her tax preparer to properly report the QCD on a 1040 tax return. It is also strongly suggested that the IRA holder obtains a receipt from the charitable organization.
Is a QCD the right strategy for you?
If you would like to learn more about QCDs, please seek the aid of a qualified tax preparer for guidance. If you have questions about how to use a QCD to help support Mount de Sales, please contact Laura Johnson, Director of Institutional Advancement at 478-751-3248 or at firstname.lastname@example.org.