Common Cents # 16 Qualified Charitable Distributions

Common Cents - QCD

This week’s information is about an opportunity to give to Charitable Organizations utilizing a special tax situation called the Qualified Charitable Distribution from an Individual Retirement Account.  This opportunity is of benefit to those age 70 ½ and older, and even if we are not yet that age, is something we should know about to share with those who are.

Generosity is a wonderful virtue. Uncle Sam even encourages our generosity by allowing us to deduct certain gifts from our income to reduce our taxes. The stipulation is that the organization we give to has to be approved and meet certain strict qualifications. These are called 501(c)3 corporations.

The way it works is that an organization incorporates in the usual way with the state and then applies to the IRS for not-for-profit status. They have to demonstrate that the purpose is not to make a profit, but to operate for the benefit of the community. The exempt organization cannot participate in political activity in any way. There are no shareholders or owners and a 501(c)3 corporation is considered to be owned by everyone. Some examples of 501(c)3 organizations are churches and other religious organizations, private schools, arts organizations, museums, and some health care organizations.

To deduct our contributions, we may need some documentation, depending upon the amount of the gift and whether it is cash or property and we must itemize our deductions using Schedule A on our income tax return.

Since the Standard Deduction has gone up in recent years, fewer people itemize their deductions, meaning that fewer people experience a tax benefit by their contributions.  There is a little-known provision in the tax code which allows some very cool tax benefits if the taxpayer qualifies.

If a person is over age 70 ½, they can make a contribution directly from an Individual Retirement Account (IRA) to the eligible organization without any income tax having to be paid on the contribution. The retirement fund trustee or financial institution who manages the IRA sends a check or electronic transfer directly to the charity of choice. Doing this withdraws money from the IRA and gives it to the church or whoever is chosen, except that by giving directly from the IRA it does not count as income to the IRA account owner. Since the funds are not touched by the owner, it is not reported as income on the tax return. That means that the Standard Deduction can be taken, the contribution doesn’t increase the taxable amount of Social Security, and even more importantly, does not affect state or federal income taxes at all.

This arrangement is called a Qualified Charitable Distribution (QCD) and counts toward the Required Minimum Distribution (RMD). While the RMD was set aside this year as part of the Covid-19 financial relief provisions, it is likely to resume at some point in the future.  It also became possible as part of the Covid-19 changes for people over 70 ½ to continue contributing to their IRA if they are still earning income.  So, one could reduce the amount of taxable income by the amount put into the IRA and also not pay tax on the funds given away using the Qualified Charitable Contribution.

It’s always good to know that generosity can be rewarded by getting the most from each dollar given, even tax-free in cases like these.