Do You Donate to Charity?
By now, you probably know that thanks to the Tax Cut and Jobs Act’s higher standard deduction, fewer taxpayers are itemizing on their returns. That might make doing taxes easier, but those who use the standard deduction miss out on several popular tax breaks, including claiming deductions for donations they make to a qualified charity.
Fortunately, there is a strategy that can keep both givers (at least those who are retirement age) and charities on course with charitable donations. Taxpayers age 70½ and older can use a qualified charitable distribution (QCD) to donate up to $100,000 annually directly from a traditional IRA to an eligible public charity without counting that amount as taxable income. Instead, if applicable, it could (for those age 72 or older) count toward your required minimum distribution (RMD) and reduce the taxable amount of your mandatory withdrawal.
Using your RMD as a charitable contribution will exclude that amount from your adjusted-gross income (AGI) for the year, which means that in addition to reducing your income taxes, it also may decrease the amount of Social Security that is subject to tax and potentially lower your Medicare premiums. Even if you are under the RMD age of 72, a QCD is a way to get pre-tax money out of your IRA and pay 0% tax while lowering future Required Minimum Distributions.
If this sounds like a strategy that could work for you, here 10 things you need to know:
1. Must be Age 70 ½
A QCD is only allowed if the distribution is made on or after the date you actually attain age 70 ½. It is not sufficient that you will turn 70 ½ later in the year.
2. Beneficiaries Can Do QCDs
QCDs are not limited to IRA owners. An inherited IRA beneficiary may also do a QCD. All the same rules apply, including the requirement that the beneficiary must be age 70 ½ or older at the time the QCD is done.
3. Eligible Retirement Accounts
You may take QCDs from your taxable IRAs funds. QCDs are also permitted from SEP and SIMPLE IRAs that are notstill contributory. QCDs are not available from an employer plan
4. $100,000 Annual Limit
QCDs are capped at $100,000 per person, per year.
5. RMD Can Be Satisfied
A QCD can satisfy (or partially satisfy) your required minimum distribution (RMD) for the year. A QCD can also exceed the RMD amount for the year up to $100,000 annual limit.
6. Only Taxable Amounts
QCDs apply only to taxable amounts. No basis (nondeductible IRA contributions or after-tax rollover funds) can be transferred to charity as a QCD.
7. Direct Transfer is a Must
If you want to do a QCD, you must make a direct IRA transfer from the IRA to the charity. If a check that is payable to a charity is sent to you for delivery to the charity, it will qualify as a direct payment.
8. Charitable Contribution Requirements
A QCD can only be made to a charity which is eligible to receive tax-deductible charitable contributions under IRS rules.
9. Charitable Substantiation Requirements Apply
You should have documentation to substantiate the donation (something in writing from the charity showing the date and amount of the contribution).
10. Reporting on the Tax Return
The IRA custodian will not be separately reporting the QCD. There is no code or box on the 1099-R to identify the QCD. It will be up to you to let the IRS know about the contribution by including certain information on your tax return.
If you are eligible and are 70.5 years of age or older, don’t miss out on this valuable tax break! Call our office if you have any questions or if you would like to receive more information.