If you are age 70 1/2 or older and have an IRA, IRS rules require you to take a Required Minimum Distribution (RMD) every year whether or not you need it. This distribution is normally taxable income to you, but it doesn’t have to be.
A Qualified Charitable Distribution (QCD) can be a very tax-effective way to support your local qualified charity. However, as with any financial and tax strategy, it’s important to first understand the details and limitations. Qualified Charitable distributions do not provide a charitable deduction for taxpayers, regardless of whether or not you itemize deductions but they do allow you to avoid counting the distribution as income to you by transferring the distribution directly to the charity.
QCDs can offer big tax savings, as tax rates on regular income are usually the highest. If you don’t benefit from itemizing your tax deductions and are of age, then QCDs could be a good option for you to donate to your Fountain Hills Community Foundation.
As with any tax strategy, it’s important to pay close attention to the IRS rules. Here are some of the major ones:
- The retirement account owner must be age 70 1/2 or older.
- The annual QCD limit is $100,000 per account owner. Note: the limit can exceed the annual required minimum distribution.
- Donations must go directly from your IRA to the qualified public charity.
- Most types of IRAs qualify: traditional IRA, rollover IRA, inherited IRA, and inactive SEP and SIMPLE IRAs.
- QCDs only apply to taxable distributions.
QCDs can be counted toward satisfying your RMD for the year, as long as all of the rules are met. Only some of them are mentioned above.
In addition to the benefits of giving to charity, a QCD excludes the amount distributed to a qualified charity from taxable income, which is unlike regular withdrawals from an IRA. Keeping your taxable income lower may reduce the impact to certain tax credits and deductions, including Social Security and Medicare.
Also, QCDs don’t require that you itemize, which due to the recent tax law changes, means you may decide to take advantage of the higher standard deduction, but still use a QCD for charitable giving.
Here’s an example:
Let’s say you must take a RMD of $40,000 in this tax year and you really don’t need all of that income. You would like to make a $10,000 donation to your community foundation – the Fountain Hills Community Foundation (FHCF). You direct your IRA administrator to send a check to the FHCF in the amount of $10,000 and to send you a distribution of the remaining $30,000 to meet your RMD for the year. You have satisfied your RMD for the year and only the $30,000 is considered taxable income to you.
For more information, contact the Fountain Hills Community Foundation at (480) 799-3160 or e-mail at us at firstname.lastname@example.org. Additional information on the Fountain Hills Community Foundation is available at https://fountainhillsgives.com.
NOTE: This document is not intended to provide legal, accounting, or tax advice. Before acting in connection with the subject matter hereof, the reader should consult with a licensed expert in these fields.