Charitable giving plays a crucial role for many retirees. Given the tumultuous impact of the coronavirus pandemic, charities and the people they serve have seen a sharp increase in the need for financial resources; and so far, many donors have risen to the task. 

Fidelity charitable reported that over half of donors planned to maintain their levels of giving and a quarter of people planned to donate more to meet the greater needs of the community.

Given the weight and significance of charitable donations throughout this year, it’s become increasingly important to maximize the resources available to donors while still protecting their balance sheets. While you can always give through traditional avenues such as cash or check, is there a more effective way to give?

Our team talks about tax-efficiency all the time because we see first-hand the impact it has on your retirement nest egg. Tax-efficiency doesn’t begin and end with investing, rather it can be applied to every aspect of your financial life, including your annual giving plan.

Today, we are going to talk about the tax-efficient giving strategy every retiree should consider: a qualified charitable distribution (QCD).  

What is a qualified charitable distribution?

QCDs are a smart way for retirees to contribute to their favorite charities while receiving tax benefits. A QCD is a transfer of money from a Traditional IRA to a qualified public charity. Many retirees who implement this strategy, plan to donate all or a portion of their required minimum distributions (RMDs) through this giving channel to avoid excess income tax and to maximize tax savings through their charitable donations.

Why consider giving this way?

The Tax Cuts Jobs Act (TJCA), passed in December 2017, made several significant adjustments to individual income tax laws. For example, for the 2020 tax year, many Americans will not be able to deduct charitable contributions since the TJCA increased the standard deduction amount, $12,400 for those filing single and $24,800 for those married and filing jointly.

The QCD is an option to leverage the existing tax code to reduce some or all of your required minimum distribution (RMD) and donate it directly to the charity of your choice. 

What are the tax benefits of a QCD?

Here’s an example of how a QCD works. Let’s say your IRA RMD is $50,000, and you want to donate 10% of that amount ($10,000) to charity. You can use a QCD to donate $10,000 directly from your IRA custodian to your qualified charity. This $10,000 is excluded from your taxable income, thereby reducing your taxable RMD income to $40,000.

The primary, and most obvious, tax benefit is this ability to reduce your taxable income, which, in turn, allows for a lower adjusted gross income, opening up a myriad of tax-saving possibilities. 

Should your taxable income land you in a lower tax bracket, there is another opportunity for a reduced Medicare premium. You could also avoid the 3.8% surtax on net investment income for married couples earning over $250,000 ($200,000 for single unmarrieds), and/or lowering the taxable portion of your Social Security income.

Keep in mind that the CARES Act suspended RMDs for 2020. That’s not to say you can’t give with a QCD, just that you might structure your gift differently. As your financial advisor team, we consider all these factors when building the right giving plan for you.

QCD eligibility rules

Many types of IRAs qualify for the QCD option, including Traditional, Rollover, Inherited, SEP (inactive plans only), and SIMPLE (inactive plans only) IRAs, but Traditional IRAs are the most common and straightforward. 

Eligibility rules:

  • The QCD must be forwarded directly to a qualified charity. As the IRA owner, you cannot have the funds distributed directly to you and then turn them over to the charity.
  • You must be 70 1/2 or older. 
  • You are limited to $100,000 to one or more charities in a calendar year. If you are married and file taxes jointly, your spouse can make a QCD from his or her own IRA for the same amount and same calendar year. 
  • You can’t claim a charitable contribution deduction for any QCD not included in your income. In other words, you can’t deduct a QCD as an itemized charitable contribution.
  • For a QCD to count towards your current tax year’s RMD, the funds must come out of your IRA by your RMD deadline, generally December 31.
  • Contributing to an IRA may result in a reduction of the QCD amount you can deduct. (The aggregate amount of deductible IRA contributions you make to your IRA after you turn 70 1/2 will reduce the amount of the QCD that is not includible in your gross income.)
  • Any amount donated above your RMD does not count toward satisfying a future year’s RMD.

By giving, you receive

Gratitude and generosity are especially important during the holiday season, as we take stock of the year behind us and reflect on what’s to come. Charitable giving makes a tremendous difference locally and nationally, whether you give to your local animal shelter, to education programs, mental health organizations, or your favorite nonprofit.

We know from personal experience that the more we give, the happier we are and the lighter our hearts. Give what you can this year and every year. 

Contact us to learn more about QCDs and other tax-optimization strategies for the 2020 tax year.