What is a Qualified Charitable Donation?
A Qualified Charitable Donation is a tax-free distribution from an IRA to a charity. Available only to taxpayers aged 70.5 or older, a Qualified Charitable Donation (‘QCD’) is an excellent way to fulfill Required Minimum Distributions and receive a tax benefit from charitable giving.
The primary benefit of a QCD is that funds can be distributed from an IRA without any tax consequences – no income associated with the distribution nor any deduction from the charitable donation. While taxpayers can always take an IRA distribution, recognize the income, and then make a charitable donation to offset the income, there are many instances when the income and deduction will not offset each other exactly.
Notably, taxpayers who take the standard deduction, now at $26,100 for married couples over the age of 65, receive no benefit from charitable giving. Making charitable donations using QCD could lower taxable income and provide a significant tax benefit from that same giving.
For example, Tom and Mary are 72 years old and have paid off their home. They live on Social Security and IRA distributions of $90,000 per year, resulting in income of $130,000 annually. They choose to tithe $13,000 each year to their local church. Since their home is paid-off and their property taxes are low, Tom and Mary still use the Standard Deduction of $26,100. Their charitable giving is not enough to cause them to itemize.
If Tom and Mary gave the $13,000 tithe using QCD, they could reduce their income by $13,000, receive the same standard deduction and save about $2,000 in taxes by simply giving directly from their IRA.
Of course, there are other instances where QCD can have advantages, including those hitting the charitable giving limitation, or those seeking to reduce gross income to lower Medicare costs. The bottom-line is that QCD is a great way to give when you are 70.5 or older. Of course, everyone’s situation is different. If you would like to take a deeper look, simply give us a call.