Qualified Charitable Distributions
February 19, 2019
If you are over the age of 70-1/2, there is a way to reduce your taxable income, and therefore the taxes you pay, by taking advantage of the Qualified Charitable Distribution (QCD) from an IRA account.
It is estimated that almost 90% of taxpayers will claim the expanded standard deduction when paying their 2018 taxes. That means that while you might be very generous in your charitable giving during the year, you won't get any specific tax deduction for your generosity. However, if you are over the age of 70-1/2, there is a way to reduce your taxable income, and therefore the taxes you pay, by taking advantage of the Qualified Charitable Distribution (QCD) from an IRA account. By having your IRA custodian make the check payable to the charity and sent directly to them, the distribution is not included in your taxable income for the year, and it also counts towards your required minimum distribution (RMD) for the year.
NOTE: The SECURE Act of 2019 changes the amount of the distribution that is tax free by requiring tax-deferred deductions to an IRA made after age 70-1/2 (new with this act) to be subtracted from the amount of the QCD to arrive at the net tax-free amount. The entire QCD can still be applied towards the RMD. See this article for a more detailed explanation.
NOTE: You must actually be over the age of 70-1/2 at the time of the distribution for it to qualify as a QCD, unlike other RMD withdrawals that can be taken any time in the calendar year that you turn 70-1/2. Also, if you have an IRA checkbook account, writing a check to an eligible charitable organization before the end of the year will not meet the QCD requirements. It must be cashed and debited from the IRA account by the custodian before the end of the year. Finally, to qualify as a QCD, there cannot be any benefit back to you from the funds that go from your IRA to the charity. Paying dues required for membership would be a benefit back to you and as such would not qualify as a QCD.
Even better than getting the effect of a deduction, reducing your Adjusted Gross Income can place you in a lower tax bracket, reduce or eliminate the taxation of your Social Security benefits and help you remain eligible for deductions and credits that might be lost if you had to declare the QCD amount as income.
For a more detailed explanation of a QCD, check out this article. We are not tax experts, so be sure to consult with your tax accountant; here's a detailed article on the IRS requirements.