Renner Individual News; December 2, 2022—Joan M. Renner, CPA, CGMA
As the end of the year approaches, many individuals make charitable contributions to reduce their tax bill. Generally, this strategy pays off with higher deductions for those who itemize.
However, what about those who take the standard deduction? If you’ve reached age 70½, you may qualify for a special tax benefit that’s a great way to help others and reduce your tax bill at the same time.
This benefit is called a Qualified Charitable Distribution (QCD). Many qualifying taxpayers are not aware that they can get a tax benefit for donating to charity whether they itemize or take the standard deduction. Basically, it works like this:
- If you have reached age 70½, and
- You are donating to charity, and
- You are taking taxable distributions from your IRA,
- You can benefit by instructing your IRA trustee to make the donation directly from your IRA account to the charity in a Qualified Charitable Distribution (QCD).
At age 72, taxpayers are required to take money out of their IRA every year as a Required Minimum Distribution (RMD). Normally, IRA distributions are included in taxable income. However, if you meet all these requirements, the QCD is excluded from your income. Not a bad way to help offset the income from your RMD.
You won’t receive a charitable deduction for the QCD, but this doesn’t really matter because the distribution is excluded from your income in the first place. Plus, if you fall in the standard deduction category, the QCD will be excluded from your income and you’ll still get your standard deduction. For 2022, married filers age 65 or over get a standard deduction of $27,300; $14,700 for single filers. Best of all, you’ll still be giving to your favorite qualified charity.
For instance, consider a 73-year-old couple with a joint annual RMD of $30,000. If they direct $10,000 to charity as a QCD, it will reduce their taxable income by $10,000 and they still get to claim the same $27,300 standard deduction. In the 24% tax bracket, that is a federal tax savings of $2,400, and they will have additional tax savings at the state level.
You don’t have to have an RMD requirement to make a QCD.
You only have to reach age 70½ to do a QCD; your RMD may not start until age 72. If you do have an RMD, you don’t’ have to use all of your RMD for the charitable distribution. A QCD can be any portion of the annual distribution, as long as it is paid directly from your IRA to the charity. If part of your IRA distribution is not subject to tax, the QCD amount can’t exceed the amount of the distribution that would have been taxable.
Don’t make the payment yourself.
It isimportant to remember that you can’t take the cash out of your IRA, put it in the bank and then write a check to your charity. That won’t work, and your distribution in that case would be taxable. It has to be transferred directly from your IRA to the charity through the trustee of the IRA.
A QCD can be up to $100,000.
QCDs are exempt from taxation for any amount up to $100,000 as long as the distribution comes from a qualified account and is donated to a charity that is eligible to receive tax deductible contributions. A married couple may contribute $100,000 each, up to a maximum of $200,000. The amount you distribute in a QCD counts toward your annual required minimum distribution (RMD).
QCDs are limited by IRA contributions after age 70½.
If you have made IRA contributions after reaching age 70½, your benefit from a QCD is reduced or eliminated. The IRS provides a worksheet to calculate the adjustment. These are the basics on QCDs, but there’s more to know that may affect your situation.
Contact us if you’d like to discuss how making a qualified charitable distribution may help reduce your tax bill and benefit your qualified charity of choice.
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