By Jason Epps, CFP®
You’re already prioritizing charitable giving as part of your overall financial picture, so why not streamline the process and employ a tax-mitigation strategy?
If you’re taking an RMD (required minimum distribution) and giving to charity, learn why doing both together can be a win-win.
Benefits of Making a Qualified Charitable Distribution
While cutting out yourself as a middleman saves you a lot of time and administration, that’s not where the greatest benefit of a QCD (qualified charitable distribution) lies. The greatest benefit is actually financial. You can save money on taxes by sending your RMD directly to a charity instead of taking it for yourself first.
When you make a QCD, it is excluded from your taxable income because the amount that you donate never shows up on your tax return. This leaves you with a lower taxable income and, therefore, a lower tax bill. And you don’t even have to itemize your deductions to get this tax break.
Are You Eligible to Make a Qualified Charitable Distribution?
Not all retirement accounts are eligible to use the funds as a QCD. It has to be an IRA that is a traditional, rollover, inherited, inactive SEP, or inactive SIMPLE plan. A SEP or SIMPLE is considered inactive if no employer contribution has been made during the plan year that ends during the tax year that the charitable contribution is made.
In addition to having the right kind of account, these other requirements must be met:
- You must be age 70½ or older.
- To count toward the RMD for the year, the funds must come out of the IRA account by the RMD deadline, which is usually December 31. Excess donations cannot count toward future-year RMDs.
- QCDs cannot be greater than the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
- Total QCDs cannot exceed $100,000 per calendar year per taxpayer, regardless of the number of charities donated to.
- Funds must be distributed directly to the charity. If you take a distribution and then give it to charity, it does not count as a QCD.
Is Your Charity Eligible to Receive a Qualified Charitable Distribution?
After establishing your own eligibility, you need to make sure that your charity is also eligible to receive a QCD. First, it must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions.
On top of that, there are certain types of organizations that are not eligible to receive QCDs. They are:
- Private foundations
- Supporting organizations (charities that only exist to support other exempt organizations, usually public charities)
- Donor-advised funds managed by public charities on behalf of individuals, families, or organizations
How Are Qualified Charitable Distributions Reported?
Unless it is an inherited IRA, QCDs are reported as normal distributions on Form 1099-R. For inherited IRAs, they are reported as death distributions. Though state rules vary, QCDs are not subject to federal tax withholding.
Because it is already tax-free, you may not claim the QCD as a charitable tax deduction. Even though you aren’t claiming it as a deduction, you need the same acknowledgment of the donation that you would need if you were. Keep this in your records in order to document the fact that the QCD was in fact qualified.
Work With a Professional
At KFA Private Wealth Group we prioritize giving back to our communities and living generously. We’re here to help you navigate through your charitable giving options, and are dedicated to helping you transform your wealth through customized strategies so you can achieve your goals and receive a new vision of what’s possible.
If you have questions or just want to get started, reach out by emailing me at jepps@kfapwg.com or calling 571-386-2022 to schedule an appointment.
About Jason
Jason Epps is vice president and private wealth advisor at KFA Private Wealth Group, a registered independent advisory firm founded on the premise of providing conflict-free financial and investment advice. With over 15 years of experience, Jason possesses the unique knowledge and expertise necessary to provide his clients with the most applicable and beneficial financial guidance that helps them find confidence in their financial future. Jason is a CERTIFIED FINANCIAL PLANNER™ practitioner and a Chartered Retirement Planning Counselor℠, CRPC®, and believes that a financial plan is only as strong as the advisor’s understanding of the core values and beliefs of each client. He serves a diverse range of clients, from young accumulators to pre-retirees and retirees, including business owners and professionals in a variety of fields. Jason is passionate about giving back to his community and volunteers with various organizations in the D.C. metro area. He also has coached youth travel and AAU basketball since 2009. When he’s not working, you can find Jason spending time with friends and family, traveling, trying out new restaurants, and cheering on local D.C. sports teams. To learn more about Jason, connect with him on LinkedIn.