The Return of Qualified Charitable DistributionsFebruary 4, 2016 2:19 pm
I love a good comeback, so I was especially pleased to learn that Congress brought back qualified charitable distributions in 2015. A qualified charitable distribution (QCD) is a donation made directly from your IRA to a charity when you have reached the age of 70 ½. 70 ½ is the magic age when Uncle Sam says it’s time to start taking money out of your traditional IRAs. The amount you need to take out, also know as your Required Minimum Distribution (RMD), is calculated based on the value of your account and your life expectancy. You must remove the specified amount (or more if you like) by the end of the year or you may be subject to a severe 50% penalty. So since you need to withdraw the money from your IRA, one option is to use it to support a charity of your choice.
Funds withdrawn from your IRA are taxed as ordinary income, but if you donate the money, it counts towards your RMD while not being included in your adjusted gross income. You are not allowed to then also use the QCD as an itemized charitable deduction, so you may need to do a comparative analysis to calculate the tax savings if you are normally eligible to itemize. As previously stated, the amount donated is not included in your AGI so the resulting lower AGI could have tax savings effects on other tax items like income tax paid on Social Security benefits and Medicare premiums to name a few. If you do not usually itemize, the QDC is undoubtedly the way to go.
There are, of course, rules that need to be followed to receive the favorable tax treatment that the QCD offers. There is a $100K limit per year on charitable gifts made directly from your IRA. The check must be payable to the charity (not to you) to qualify. The charity must be made to an organization eligible to receive tax- deductible charitable donations as determined by the IRS. The charity should issue you an acknowledgement of the donations for your tax records. You must have reached the age of 70 ½, so save your generosity until after your actual birthday. Of course, the end of year deadline still applies for taking your RMD so you’ll want to make sure donation checks have been cashed by December 31st.
We’ve handled QCDs in past years here at StrategicPoint, and the process is quite simple. Our client signs a form to have to have all or a portion of their RMD made payable to the charity or organization. Our custodian will then mail the check directly to the charity or to the client should they choose to deliver it themselves.
Lastly, the QDC has now been permanently extended. It was brought back retroactively for 2015, but is in place for 2016 and beyond unless Congress makes another change at some point down the road. So you no longer have to guess if it will be an option. You will just need to decide on an organization deserving of your qualified charitable donation.
Chrissy Canapari serves as Senior Financial Advisor and Manager of Client Services at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at email@example.com.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Chrissy’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.