November 18, 2019


Qualified charitable distributions – a year-end tax tip

Are you 70 ½ or older? Do you still need to take part, or all, of your required minimum distribution (RMD) from your IRA? Are you planning on making any charitable donations before the end of the year? If the answers to these questions are yes, consider making the charitable donation(s) directly from your IRA. According to the IRS, “[a] qualified charitable distribution (QCD) generally is a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions.”

Making a QCD excludes the distribution from income (up to $100,000 per person, per year), and counts towards your annual distribution requirement. Excluding the IRA distribution from income is more beneficial than taking a charitable deduction in most cases. However, for those taxpayers who will claim the standard deduction, making a qualified charitable distribution is even more attractive.

Jane, age 72, has a $1,000 distribution requirement from her IRA that must be taken by the end of the year. She also wants to make a $1,000 donation to her favorite qualified 501(c)(3) organization in December. Jane files a joint tax return with her spouse and has no itemized deductions besides her state income and property taxes, which are capped at $10,000.

Jane is better off making a qualified charitable distribution of $1,000 from her IRA to her favorite charity, rather than receiving the distribution and donating the cash. The reason is that Jane will take the $24,400 standard deduction under either scenario. Therefore, excluding the $1,000 from income is more advantageous than taking the income and a subsequent charitable deduction, which she will not actually end up taking on her return.

Making a qualified charitable distribution is fairly straightforward. Contact your IRA custodian, or Rockbridge advisor, and request a distribution. Make sure the check is made payable directly to the charity and not in your name. Request that no taxes be withheld from the distribution at either the federal or state level. Finally, have the check sent directly to the charity (if the custodian requires the check get sent to the IRA owner, make sure to forward the check to the charity as soon as possible).

If you are considering making a QCD, please keep in mind the following:

  • You must be at least 70 ½ year old when the distribution was made.
  • You must obtain an acknowledgement letter from the charitable organization containing certain information required by the IRS.
  • If your IRA contains both pre-tax and after-tax contributions, be sure you check with your accountant or Rockbridge advisor before making a QCD.

While making a QCD is generally more advantageous from a tax standpoint than taking the IRA distribution and taking a charitable deduction, everyone’s situation is different. Be sure to check with your accountant or Rockbridge advisor if you think this technique may be right for you.

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