By Greg Hart, CFP®
“Giving is not just about making a donation. It is about making a difference.” I love this Kathy Calvin quote, and I bet it strikes a chord with you as well. You recognize that the world extends beyond just you and your family and you want to leave your mark on it. You seize opportunity when it is presented, and seek to share the knowledge and wealth you’ve acquired along the way. You live your life generously and your giving is intended to make a difference.
That’s your purpose in giving to charity; our job at Haddon Wealth Management is to help you do it in the wisest way possible. Every dollar we can save you in taxes is another dollar you can use to make the world a better place.
One way to do this is to send your required minimum distributions (RMDs) straight to a charity instead of transferring the money into your bank account first. This is called a qualified charitable distribution (QCD).
Benefits Of Making A Qualified Charitable Distribution
While cutting out yourself as a middle man saves you a lot of time and administration, that’s not where the greatest benefit of a QCD lies. The greatest benefit is actually financial. You can save a lot of 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.
Having a lower taxable income also helps in other ways, such as making you eligible for more tax credits and deductions with a lower taxable income. Not to mention, you may be able to avoid paying extra for Medicare.
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. (1)
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
Giving to charity is a top priority for you. You’re going to give regardless, so why not do so in the most tax-efficient manner possible? QCDs are a great opportunity for anyone who is required to take minimum distributions from their retirement accounts.
Many specific rules and requirements must be met in order for distributions to qualify for exempt status, so it’s a good idea to work with an experienced financial professional to ensure you make a QCD the right way. If you’re interested in learning more about qualified charitable distributions, our Haddon Wealth Management team is here to help. Call us at (856) 888-1744 or contact us online to schedule a complimentary meeting so we can answer your questions. We look forward to hearing from you!
Gregory M. Hart, CFP® is the founder and managing director of Haddon Wealth Management, LLC, a registered investment advisory firm that provides comprehensive wealth management (in-depth financial planning and sophisticated investment management) for clients who value a relationship-driven approach that delivers customized solutions. Based in Haddonfield, New Jersey, Greg works with clients throughout the Delaware Valley, as well as nationwide. To learn more, connect with Greg on LinkedIn, visit our website at www.haddonwealthmgt.com, or call (856)-888-1744 to begin a discussion.