How A QCD Can Boost Your Giving and Lower Your Taxes
The pandemic issued a surge in charitable need, efforts, and donations. Given the economic turbulence, many wondered how charities, and the people they serve, would fare. But studies have shown that even in these dark times, giving is on the rise.
Fidelity Charitable conducted a survey that found most people anticipated giving the same amount as planned, with 25% electing to donate more in the wake of the virus. Charitable giving is a crucial part of many people’s financial lives. Using your money to further causes, organizations, and communities you care about brings more meaning and fulfillment into your life.
Charitable giving also comes with important tax benefits, which can help you lower your taxable income and save money. Employing tax-efficiency into your financial plan is crucial, especially for retirees.
But, traditionally, to reap the tax benefits of charitable donations, you have to itemize deductions on your taxes. Given the increased standard deduction ($12,400 filing single and $24,800 if married and filing jointly for 2020), that becomes nearly impossible for many families to do.
But retirees have another option, qualified charitable distributions (QCDs). What are QCDs and how can they impact your giving strategy? Let’s find out.
What is A QCD?
A QCD allows retirees to donate funds from a traditional IRA to a qualified charity. To initiate a QCD, you must be at least 70 ½, and donations are limited to $100,000 per account holder each year. Here are a few other QCD basics,
- To obtain the tax deduction, QCDs must have a direct custodian transfer meaning that the money must go directly from your IRA to the charity of your choice. Should you withdraw the money then donate it to charity, it can’t be considered a QCD and you will be responsible for the tax implications of the distribution.
- QCDs only apply to qualified 501(c) (3) charities. Donor-advised funds, private foundations, and supporting organizations don’t qualify.
- QCDs are reported on a 1099 form, and you don’t have to itemize to use a QCD.
- You can’t also claim the QCD as a charitable tax deduction.
- QCDs can be made with many types of IRAs, Inherited, SEP, SIMPLE, and under certain circumstances even a Roth, but the most common is a traditional IRA.
Many retirees use QCDs to satisfy their required minimum distribution (RMD) obligations for the year, which lowers their taxable income and maximizes their charitable contributions.
Before we move on, let’s have a quick refresh on a couple of traditional IRA particulars.
- Withdrawals from a traditional IRA are taxed as ordinary income, which can impact your tax bracket and future tax bill. By donating the money as opposed to withdrawing it, you reduce your taxable income for the year.
- Traditional IRAs carry required minimum distributions (RMDs), which dictate a set amount of money that must be withdrawn from the account each year. RMDs are calculated by the account balance and life expectancy and must be taken by December 31 each year. Need to determine your RMD? This calculator can help.
Upon its conception, QCDs allowed retirees to donate all or a portion of their RMDs to charity. This strategy helped lower their adjusted gross income and maximize the gift they were able to make to the charity of their choice. But, provisions in the SECURE Act may change the way people use QCDs.
How does the SECURE Act factor in?
A hallmark provision of the SECURE Act was raising the age for RMDs from 70 ½ to 72. This change encouraged accelerated retirement savings and allowed for a couple of extra years of compounding investments.
But it also means that current and new retirees will adjust their use of QCDs, many waiting to start donating until RMDs kick in at 72. It’s also important to note that the CARES Act suspended RMDs for 2020, so some retirees who normally give with QCDs, don’t have to count that gift as an RMD.
These are the mildest changes retirees need to concern themselves with. What retirees really need to keep in mind are IRA contributions after 70 ½.
Before, once you turned 70 ½, you were unable to contribute to your IRA. But now, anyone who earns an income can contribute. So if you are retired, but still earning income, you can actively contribute to your traditional IRA. How does this change impact QCDs?
The provision only affects people who initiate QCDs and make deductible IRA contributions. The rule states that any contributions made to an IRA after 70 ½ can’t be used for QCDs. While the rule doesn’t change what contributions are deductible, it does change how much a QCD can lower your taxable income.
Let’s look at an example. Say you donate $10,000 through a QCD and also contribute $5,000 to your traditional IRA. While the charity receives the full $10,000, the tax-free portion of your QCD falls to $5,000, with the remaining amount subject to taxes. This wrinkle in your strategy should be discussed with your financial advisor alongside your tax professional to make sure you are making the most of your contributions.
How Legacy Wealth Can Help
QCDs are an excellent giving vehicle that allows retirees to maximize their donations while also employing key tax advantages.
We love helping our clients build a charitable giving strategy that aligns with their values, helps them establish a legacy, and furthers their financial plan.
Your giving might look different this year. Perhaps you can’t donate in the same way or you are looking to give your time and talents by volunteering in your community. No matter what is available to you this year, take the time to decide how you want to further your charitable efforts this season and beyond.
Ready to revamp your charitable giving strategy? Schedule a 15-minute call with our team today.
