This is the time of year when many Americans are thinking about taxes and getting their finances in order. It’s also a good time to plan and strategize about your charitable contributions for the year ahead.
Yes, believe it or not, there are better and worse ways to give. And while we believe your primary motivation to donate is cultivating your values in the world, both you and the charities you support can benefit when you are aware of the added tax advantages.
So before you make out that check to your favorite charity, you’ll want to fully understand your options. This blog article discusses some of the rules, benefits, and questions to ask your tax advisor.
What is a Qualified Charitable Distribution (QCD)?
If you make a gift to a qualified charitable organization—a 501(c)(3) organization, like the Exchange Family Center—you are eligible to receive an income tax deduction. Gifts may include cash, vehicles, clothing, furniture, equipment, and other property. Be sure to consult with a tax expert about the requirements, limitations, and proper documentation needed to claim your charitable tax deduction.
Besides the types of donations listed above, one of the most common ways for donors to make charitable contributions is to use a qualified charitable distribution (QCD), which is a direct transfer of up to $100,000 from an Individual Retirement Account (IRA).
Many donors who have given to charities throughout their lives, might not realize there are special benefits to giving directly from your IRA using the QCD. However, this special way to give is only available to certain individuals. Continuing reading to see if you qualify and how to benefit.
Can I make a QCD?
When you reach the required age (70½), you are required to take a minimum distribution from your IRA. But if you don’t need the funds, a QCD counts toward your minimum distribution and is one way to maximize your charitable impact, while reducing your tax liabilities. While most non-Roth IRAs are eligible for QCDs, there are other requirements:
You must be 70½ or older to be eligible to make a QCD.
QCDs are limited to the amount that would otherwise be taxed as ordinary income. This excludes non-deductible contributions.
The maximum annual amount that can qualify for a QCD is $100,000. This applies to the sum of QCDs made to one or more charities in a calendar year. (If, however, you file taxes jointly, your spouse can also make a QCD from his or her own IRA within the same tax year for up to $100,000).
For a QCD to count towards your current year's required minimum distribution (RMD), the funds must come out of your IRA by your RMD deadline, generally December 31.
Any amount donated above your RMD does not count toward satisfying a future year's RMD.
Funds distributed directly to you, the IRA owner, and which you then give to charity do not qualify as a QCD.
Under certain circumstances, a QCD may be made from a Roth IRA. Roth IRAs are not subject to RMDs during your lifetime, and distributions are generally tax-free. Consult a tax advisor to determine if making a QCD from a Roth is appropriate for your situation.
Benefits for Donors and Charities
What are the the benefits for making a qualified charitable distribution (QCD) from your IRA? The main benefit for donors is that an IRA charitable contribution allows you to meet your RMD requirements without adding to your taxable income. This can potentially keep you in a lower tax bracket and may reduce the impact of certain tax credits and deductions that can increase your tax liability, including Social Security and Medicare.
In addition, using a QCD is a simple way to reduce your tax burden since itemization is not required to make a QCD. A QCD is reported as a normal distribution on IRS Form 1099-R for any non-Inherited IRAs. Due to recent tax law changes, this means you may decide to take advantage of the higher standard deduction, but still use a QCD for charitable giving.
What kind of charities qualify?
The charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions.
Some charities do not qualify for QCDs:
Supporting organizations: i.e., charities carrying out exempt purposes by supporting other exempt organizations, usually other public charities
Donor-advised funds, which public charities manage on behalf of organizations, families, or individuals
Questions to ask before deciding on a IRA charitable contribution: Before donating to the charity of your choice, there are several questions you should review with your tax advisor. To fully understand what’s best for your family and the charitable cause you want to support, consider the following:
Do you have IRAs? Are you 70½ or older and required to take the minimum required distribution (RMD)? If you answered “no” to either question, you are not eligible for an IRA charitable contribution and need to consider an alternative.
Is the charity qualified to accept an IRA charitable contribution? Some charities are not eligible to receive QCDs. This includes donor-advised funds, private foundations, and supporting organizations as described in IRC Section 509(a)(3). Furthermore, a donor is not allowed to receive a benefit in return for a charitable donation. Some smaller charities may not be equipped to handle QCDs and may prefer to receive contributions via a donor-advised fund.
Do I want to phase the gift to a charity over time? Sometimes it is better for your chosen charity, particularly small organizations, if you phase in a large gift. And sometimes you need more time to decide where you want your funds to be distributed. If so, it may be preferable to make a gift to a donor-advised fund that makes it possible to better time the distribution of funds.
What are the estate planning implications? Your giving strategies can have implications for estate planning. IRAs that are passed on to heirs, for example, may be subject to income taxes and estate taxes.
The details of your personal tax situation will determine the potential benefits of using particular strategies to give to your preferred charities. A tax advisor can help you determine if both your IRA and charity qualify for QCDs.
At the Exchange Family Center, we rely on our donors for everything from expenses associated with our recent move to making our families feel extra special throughout the year. As you consider your charitable contributions for the year ahead, we hope you will keep us in your plans. We’re always happy to receive your generous donations, here. Thanks for your continued support!
Disclaimer: The above content is intended for informational purposes only. We are not qualified tax experts and we encourage all donors to consult with tax advisors if they have questions. No one associated with the Exchange Family Center receives financial or other benefits from the organizations linked to in this article.