Published by Mark Ring, Wealth Advisor
If you’re like most of our clients, you are generous. You realize that the world goes far beyond just you and your family and you want to leave your mark on it. You are grateful for the opportunities you have received and want to pass it forward in a meaningful way.
You give to charity because you feel that it is the right thing to do. Our job at Jacob William Advisory is to help you do it in the wisest way possible. Every dollar that we can save you in taxes is another dollar that you can use to make the world a better place.
Did you know that you can send your required minimum distributions (RMDs) straight to a charity? Instead of transferring the money into your bank account first, you can have it sent directly to a charity. This is called a qualified charitable distribution (QCD).
Benefits Of Making A Qualified Charitable Distribution
While cutting out yourself as a middle man saves you a lot of time and administration, that’s not where the greatest benefit of a QCD lies. The greatest benefit is actually financial. You can save a lot of money on taxes by sending your RMD directly to a charity instead of taking it for yourself first.
When you make a QCD, it is excluded from your taxable income. The amount that you donate never shows up on your tax return. This leaves you with a lower taxable income, and, therefore, a lower tax bill. And you don’t even have to itemize your deductions to get this tax break.
Having a lower taxable income also helps in other ways. You may be eligible for more tax credits and deductions with a lower taxable income. Also, you may be able to avoid paying extra for Medicare.
Are You Eligible To Make A Qualified Charitable Distribution?
Not all retirement accounts are eligible to use the funds as a QCD. It has to be an IRA that is a traditional, rollover, inherited, inactive SEP, or inactive SIMPLE plan. A SEP or SIMPLE is considered inactive if no employer contribution has been made during the plan year that ends during the tax year that the charitable contribution is made.
In addition to having the right kind of account, these other requirements must be met:
- You must be age 70½ or older.
- To count toward the RMD for the year, the funds must come out of the IRA account by the RMD deadline, which is usually December 31. Excess donations cannot count toward future year RMDs.
- QCDs cannot be greater than the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
- Total QCDs cannot exceed $100,000 per calendar year per taxpayer, regardless of the number of charities donated to.
- Funds must be distributed directly to the charity. If you take a distribution and then give it to charity, it does not count as a QCD.
Is Your Charity Eligible To Receive A Qualified Charitable Distribution?
After establishing your own eligibility, you need to make sure that your charity is also eligible to receive a QCD. First, it must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions.
On top of that, there are certain types of organizations that are not eligible to receive QCDs. They are:
- Private foundations
- Supporting organizations (charities that only exist to support other exempt organizations, usually public charities)
- Donor-advised funds managed by public charities on behalf of individuals, families, or organizations
How Are Qualified Charitable Distributions Reported?
Unless it is an Inherited IRA, QCDs are reported as normal distributions on Form 1099-R. For Inherited IRAs, they are reported as death distributions. Though state rules vary, QCDs are not subject to federal tax withholding.
Because it is already tax-free, you may not claim the QCD as a charitable tax deduction. Even though you aren’t claiming it as a deduction, you need the same acknowledgment of the donation that you would need if you were. Keep this in your records in order to document the fact that the QCD was in fact qualified.
Work With A Professional
You are a generous person, so you are going to give to charities anyway. Why not do it in the most tax-efficient manner possible? QCDs are a great opportunity for anyone who is required to take minimum distributions from their retirement accounts.
Yet there are a lot of specific rules and requirements that must be met in order for the distributions to qualify for exempt status. Because of this, it is a good idea to work with an experienced financial professional if you want to make a QCD the right way. If qualified charitable distributions sound like something you might be interested in, call us at Jacob William Advisory at 410-821-6724 or email [email protected] to discuss how we can help you save on taxes in order to make the world a better place.
Mark Ring is the co-founder and Managing Partner of Jacob William Advisory, a wealth management firm whose sole mission is to service their clients’ needs beyond their expectations. Mark has over 30 years of industry experience and for the past decade, he has been committed to building Jacob William Advisory into one of the foremost wealth advisory firms. Mark graduated from the University of Maryland with a Bachelor of Science in Economics and spends his time outside of the office with his wife, Nancy, and his two wonderful children. He gives his time to numerous nonprofit organizations related to education and the arts, often serving as a board member. He enjoys playing tennis, golf, bicycling, cooking, and traveling. Learn more about Mark by connecting with him on LinkedIn.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor.