Tax Savings through Qualified Charitable Distributions (QCD)
Federal legislation was passed at the end of 2015 making the IRA direct charitable rollover gift option permanent. Now, each year, persons over age 70 ½ may make gifts to charity directly from individual retirement accounts (IRAs) without including the distribution as personal income, but counting the gift toward the required minimum distribution. These distributions are termed Qualified Charitable Distributions (QCD). The QCD giving strategy has at least four potential tax-saving elements.
First: QCDs are not included in your adjusted gross income (AGI). This lowers the odds that you will be affected by various unfavorable AGI-based rules — such as those that can cause more of your Social Security benefits to be taxed and less of your rental estate losses to be deductible. Lower AGI also lowers the floor for medical expense and miscellaneous deductions. Also, QCDs are exempt from the rule that says your itemized charitable write-offs for the year cannot exceed 50% of AGI (any excess donations are carried forward for up to five years). It also may impact high income taxpayers by impacting the phase out of personal exemptions and deductions. Higher AGI may also push you to a higher Medicare Insurance premium.
Second: A QCD from a traditional IRA counts as a distribution for purposes of the required minimum distribution rules. Therefore, you can arrange to donate all or part of your required minimum distribution amount (up to the $100,000 limit) that you would otherwise be forced to receive and pay taxes on.
Third: Say you own one or more traditional IRAs to which you have made nondeductible contributions over the years. Your IRA balances consist partly of a taxable layer (from deductible contributions and account earnings) and partly of a nontaxable layer (from those nondeductible contributions). Any QCDs are treated as coming straight from the taxable layer. Any nontaxable amounts are left behind in your IRA(s). Later on, those nontaxable amounts can be withdrawn tax free by you or your heirs.
Fourth: QCDs reduce your taxable estate.
Key Points:
- You must be at least age 70 ½ when the gift rollover distribution is made.
- The law applies only to IRA accounts (either Traditional or Roth). Other plans such as 401(k) or 403(b) plans do not qualify.
- The QCD(s) must be made directly from your IRA administrator to your church, UM organization or other favorite charity. (Note: The distribution will not qualify under this legislation if the IRA owner receives the distribution and then writes a check to the charity. Such distributions are income to the owner, and the owner may then claim an itemized charitable deduction for the gift.)
- Total IRA rollover gifts are limited to $100,000 per taxpayer per year. If married and each spouse has an IRA, then each may gift up to $100,000 per year.
- The gift counts toward your IRA required minimum annual distribution (RMD).
- The gift distribution is excluded from your income for federal and income tax purposes. Although you cannot deduct the gift on your income tax return, the distribution is not reported as income so there is no adverse income tax effect. It is likely to have the same effect on state income taxes depending on the state where you file.
- Your QCD may not be used to contribute to a private foundation, donor advised fund, supporting organization, a charitable gift annuity or a charitable remainder trust.
For more information you may contact the Finance and Stewardship Team. Individuals will also want to discuss this with their own tax advisors and IRA administrators.
The forgoing outline is provided for informational purposes only and is not intended as financial, tax or legal advice.