As we approach the end of the year, many people who have not yet taken their Required Minimum Distribution (RMD) from their IRA are arranging to do that now. This month’s giving strategy involves a tax-favored way that you can make a gift directly from your IRA to a cause that is near and dear to your heart. As you can see from our little chart above, this would be a current gift. There’s a bit of complexity to it and . . . (See More).
it can be beneficial for income tax purposes. When you have money in an IRA account, the law requires that once you reach the age of 72, you must take distributions from your IRA and the money distributed to you is taxable for income tax purposes. Some people in a comfortable financial position don’t really need that required distribution to meet their retirement income needs and it can be viewed as a burden because of the income taxes that must be paid. The Qualified Charitable Distribution (QCD) may be the answer if you find yourself in this position.
The Qualified Charitable Distribution is available for taxpayers over the age of 70½ -- the age was not changed with the SECURE act a few years ago that changed the RMD age to 72. You can give up to $100,000 per year via the QCD ($200,000 for married couples filing jointly.) It is very important that the distribution be made directly from the IRA custodian to the charity – if you were to take possession of the money and then give it to the charity, that would be a taxable distribution to you and you lose out on the tax advantages of this strategy. The distribution that goes directly to the charity via the QCD can satisfy your obligation (or part of your obligation, depending on your individual circumstances) for the Required Minimum Distribution from your IRA. The distribution must be made to a qualified charity – an organization that is recognized by the IRS as a 501(c)(3) entity. When you make this kind of gift directly to charity using the QCD, you are not eligible to claim an income tax charitable deduction for that gift – the IRS doesn’t allow you to “double dip” in that way. If you are also making other charitable gifts that may be deductible, you should talk with your tax adviser so that you can correctly coordinate the QCD with other charitable giving during the year. For taxpayers who do not itemize their deductions, if you were making an outright gift to charity, it’s possible that you could not take full tax advantage of that gift as you may if you were itemizing. The QCD may provide a better tax advantage than a deduction for an outright gift, depending on your personal tax picture.
We’d mentioned that the QCD strategy has some complexity to it. As with all the strategies we have presented through our Giving Corner articles, you should confer with licensed tax, investment, and/or legal counsel to ensure the strategy is a good fit for your needs and that you’re following all applicable laws. While the law creating the Qualified Charitable Distribution has been around for several years, it is not used very frequently and it’s possible that not all IRA custodians are well familiar with the process. It could take a bit of time to get things arranged when you want to make the gift. Since your RMD from your IRA must be satisfied by the end of the year, you would be well served to start the process in plenty of time to get it accomplished before December 31st. You should also be aware that the tax reporting sent from the IRA custodian to you and to the IRS (your form 1099R) will not specify that this particular distribution is a QCD that went directly to the charity. You need to take the responsibility to notify your tax preparer that you have made this type of gift so it can be correctly entered into your income tax return.
To recap our strategy for this month, the QCD is a direct gift from your IRA to a charity that is available to taxpayers over the age of 70½. This gift can satisfy your obligation for your RMD and because you never take possession of the distribution, it does not add to your adjusted gross income for income tax purposes and you do not owe income tax for the distribution. You should work carefully with your IRA custodian to ensure the process happens smoothly and appropriately and you need to make sure your tax preparer knows you’ve made the QCD so that it can be accounted for correctly in your income tax return.
Northern AZ Climate Change Alliance is a 501(c)(3) entity and donations can be deductible for income tax purposes. NAZCCA would welcome your gift, whether current or future, in whatever amount your heart and finances dictate. (https://www.nazcca.org/donate)
Bonnie Lane
Verde Volunteer
Member, Board of Directors
NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel.