Qualified Charitable Distributions

Many of our clients make regular contributions to their church or to charities. Most are unaware of how to do this in a tax-efficient way. That is to do well by doing good!

Effective 2018, the tax code increased the Standard deduction for single and joint tax filers which means that fewer people can itemize charitable gifts on their taxes. However, if you are at least 70 ½ years old, you have another way to give gifts and get a dollar-for-dollar tax credit on them!

There are rules, of course, if you want to avoid paying taxes on these gifts ….

• You must be at least 70 ½
• You must be giving to a 510C3
• You must be giving the money out of your pre-tax IRA
• You must follow the process for claiming a Qualified Charitable Distribution
• There is a limit of $100,000 per year

The great thing is that this pre-tax IRA withdrawal will count toward your Required Minimum Distribution (RMD) that will be required once you reach age 72. Note that if you are already 70 ½ as-of 2020, you must begin taking RMDs now, but the same rules apply – you can take your gift from your IRA and count it as part of your RMD.

You should also consider the benefit of the QCD when making the decision to use the standard deduction versus itemizing.

For example:

Mike and Sarah are both seventy-three years old, married, and file joint taxes. Mike and Sarah give $10K to their church every year. With their other deductions they can  reduce their taxable income by $30,000, if they itemize their deductions. However, their standard deduction for 2020 is $27,400. At a high level it looks like they should itemize their deductions. If they itemize their deductions, it will result in only $2,600 of the donation to their church as tax savings.” On the other hand, if we add a QCD into their plan they would get to use the full $10,000 contribution to their church.

Another great benefit for some who are charitably inclined is that your pre-tax IRA gift may reduce the amount of your Social Security income that is taxable.

The bottom line is that you deserve to keep the money you earned. It is crucial that you work with professionals who understand this niche part of the law and can give you the correct advice based on your specific tax situation.