According to IRS statistics for 2014, almost 44,000,000 individual income tax returns were filed which included Schedule A, the form a taxpayer uses to itemizes their deductions. Of those returns, over 33,000,000 were filed claiming cash contributions to charity on the Schedule A, totaling over $155,000,000,000. So it is safe to say that many taxpayers are aware that making a donation to charity can result in a deduction, which in turn leads to lower taxes. But did you know that how you make your contribution is a very important consideration that could reduce your tax assessment even further? Look no further than the Qualified Charitable Distribution.
What is a Qualified Charitable Distribution?
A Qualified Charitable Distribution (‘QCD’) occurs when an individual/taxpayer directs the trustee of the IRA to distribute funds from a retirement account directly to a qualified, public charity. When performed correctly, the funds distributed from the IRA to the charity are not includible in income and they count toward the taxpayer’s yearly Required Minimum Distribution (‘RMD’). This means you can potentially take your entire RMD amount for a year and have it directed to a charity as part of a QCD. While this sounds simple, there are a few rules that need to be kept in mind:
- The taxpayer/individual must have attained age 70 1/2 before making a QCD,
- A maximum of $100,000 per taxpayer may be excluded by using this technique,
- Distributions must go to public charities – Distributions to Private Foundations, Charitable Supporting Organizations, or Donor-Advised Funds do not qualify, and
- Distributions are only eligible for QCD status if the deduction for the entire distribution is allowable (i.e. cannot receive any benefits from the distribution/donation).
Who can benefit from this?
While not all taxpayers will ultimately benefit from this strategy. You may be surprised to learn that a wide variety of taxpayers could benefit from this potential tax saving strategy. For example, taxpayers may see a benefit to employing this strategy in the following situations (including, but not limited to):
- Taxpayers who donate to charities and do not have enough itemized deductions to exceed the Standard Deduction – By using their RMD to make distributions to charity, they may be able to lower their taxable income (and pay less tax). Something they wouldn’t normally be able to do by simply donating cash to a charity,
- Lower Income Taxpayers – By reducing gross income, taxpayers may be able to reduce the amount of Social Security income which is being included in taxable income, or
- Higher Income Taxpayers – By reducing gross income, taxpayers may be able to reduce certain items that are affected by ‘phase outs’, or possibly even reduce the amount of income subject to the Affordable Care Act Medicare surtax calculation.
Conclusion
While the charitable contribution is a common, and effective, way to lower one’s tax. Making Qualified Charitable Distributions could be an effective strategy for taxpayers to get even more mileage out of your annual charitable contributions. Feel free to contact me if you have any questions or if you want to find out if this could be an effective strategy for you!
Andrew Johnson, CPA
AJohnson@coverrossiter.com
(302)691-2226 (direct)