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Charitable Giving and the Qualified Charitable Distribution (QCD)

Thursday, December 5th, 2019 | Uncategorized | No Comments

Are you over 70 ½ and have an IRA?  If so, you should be taking your Required Minimum Distribution (RMD).  Also, if you donate to charities, you have an opportunity to save some taxes.

IRA owners over 70 ½ should consider supporting your favorite charities using a Qualified Charitable Distribution (QCD).  A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year as long as certain rules are met.

Under the new Tax Cut and Jobs Act (TCJA), the standard deduction for 2019 will increase to $24,400.  For those taxpayers over 65, there is an additional $2,600.  It is very likely the $24,400 or $27,000 standard deductions will be greater than any itemized deductions.  

When you reach the age of 70 ½, you must start taking a Required Minimum Distribution (RMD) from your non-Roth IRAs.  Most RMDs are taxable and are included in income and increase the adjusted gross income (AGI).  This increase often results in an increased portion of Social Security benefits being taxed and some deductions being limited.  The Qualified Charitable Distribution (QCD) allows an IRA owner over the age of 70 ½ to make a charitable contribution directly from their IRA up to $100,000, without including the distribution in taxable income.

This presents a significant opportunity to make a charitable contribution through a QCD and not increase your AGI.  Although the QCD comes out of your IRA and satisfies your annual RMD, it is not reported as income on your tax return, as it goes directly to the charity of your choice.  This allows you to claim the standard deduction of $27,000 and the QCD.  

Here’s an example.  Assume you and your spouse are both over 70 ½ and you anticipate a taxable income totaling $80,000, not including your RMD.  You generally donate about $10,000 to your favorite charities each year.  You will claim a standard deduction of $27,000 since both of you are over the age of 65.  Since the standard deduction includes the deduction for charitable donations, you get no additional benefit for the donation.  

If you and your spouse are required to withdraw $10,000 to satisfy your RMD and you donate it to your favorite charity, your taxable income is increased by the $10,000 RMD and your standard deduction remains at $27,000.  You are taxed on the $10,000 RMD.

However, if you make a QCD directly to your favorite charity, it satisfies your RMD and is not included in your taxable income.  You claim the $27,000 standard deduction and save taxes on the $10,000 RMD.  This could be a potential tax savings of several thousands of dollars.

Some rules do apply. The donation must be transferred directly from your IRA custodian to the charity. The QCD is capped at $100,000 per person each year. RMDs are deemed to be satisfied by the first distributions from your IRA for the year, so if you wish to satisfy your RMD by a QCD, it needs to be your first distributions of the year. Lastly, married couples who each have an IRA each can contribute up to $100,000 from their own IRA. 

When making a QCD, you must receive the same type of acknowledgement of the donation that you would need to claim a deduction for a charitable contribution.

The bottom line is IRA owners who wish to lower their adjusted gross incomes can use the Qualified Charitable Distribution strategy to efficiently disperse money to a charity of their choice and save taxes.

As your tax advisor, the professionals at WarrenJackson CPAs can help you determine if both your IRA and charity qualify for QCDs. Contact one of our offices to speak to a tax professional.

WarrenJackson CPAs

219 West Broadway Street in Lenoir City

606 South Main Street in Sweetwater

409 College Street in Madisonville

206 North Street in Athens

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