Strategy for Making Charitable Contributions


Strategy for Making Charitable Contributions – The Qualified Charitable Distribution (QCD) is a distribution of funds from an Individual Retirement Account (IRA) that goes directly to a 501(c)(3) charitable organization.

In the recent Federal budget legislation, the Qualified Charitable Distribution for IRA’s was made permanent (a previous version expired in 2013).  If you are over 70 ½ years of age, you probably know that you must begin taking Required Minimum Distributions (RMD) from your qualified retirement accounts such as IRA’s, 401(k) and 403(b) plans and other tax-deferred accounts.  These distributions are not optional. They are fully taxable and are added to your Adjusted Gross Income (AGI).  This is important because many things are affected by AGI, such as the amount of Medicare premium you pay, your ability to deduct certain items, and taxation of Social Security Benefits to name a few.

The Qualified Charitable Deduction (QCD) says you can send that RMD directly to a charity and it will never be added to your income in the first place.  This is generally better than having it included in income and deducting it later for several reasons.  Some people don’t have enough deductions to itemize. Instead, they take the standard deduction.  That means they get no tax benefit from charitable donations, as they cannot deduct those. In this case the QCD would be the only way to realize a tax benefit from a charitable contribution, as you would be able to exclude from income what you cannot deduct.

Even if you itemize and are able to deduct your charitable contribution, having it excluded from income is better than adding it to your income and later deducting the contribution, because it keeps those funds out of your Adjusted Gross Income. Again, many things are tied to AGI that can cost you.  Medicare premiums jump almost $50 per month when single taxpayers go over $85k in AGI, or married taxpayers filing jointly have AGI over $170k.  If you are going to contribute to a charity, there may be a tax advantage to doing it with Qualified Charitable Contribution.

Here’s an example:  Suppose a taxpayer is 71 years old, filing single and wants to donate $3000 to charity in 2016.  Suppose she has to take RMD in 2016 of $2,000, has $84k in other income and she is not able to itemize deductions.

Here’s how it works the regular way:

Income            $84k

RMD                    2k

AGI                  $86k:  Medicare Part B premium goes from $121.80 to $170.50 per month.

Taxable income after standard deduction and exemption is $86k – $10,300 = $75,700.

She can’t itemize, so she is not able to deduct the donation ($3k in total).

Here’s how it works the QCD way:

Income            $84k

RMD                   $2k; Taxable amount $0      (QCD to charity of $2k)

AGI                  $84k:  Medicare Part B premium stays at $121.80.

Taxable income after standard deduction and exemption is $84k – $10,300 = $73,700.

She was able to exclude $2k of the donation; she can’t deduct the remaining $1k.

Interested? Here are the requirements:

Donor must be 70 ½ or older.

  • QCD is limited to $100,000 per taxpayer per year.
  • Donation must be from a traditional IRA (not SEP, SIMPLE, or beneficiary IRA).
  • Donor-advised funds are not eligible to receive QCD’s.
  • Direct your IRA trustee to send funds directly to a 501(c)(3) charitable organization.
  • Distributions will be reported as “Normal Distribution” on your form 1099-R.
  • Follow instructions for QCD online 15 of your form 1040, or notify your tax preparer.
  • If you itemize deductions, remember that you cannot deduct the charitable contribution if you have already excluded it from income.

Note that there are many types of qualified accounts including 401(k), 403(b), 457 plans and others in addition to IRA’s, and they are all subject to Required Minimum Distributions or RMD. However, under current rules you can only do the QCD from a traditional IRA. If you want to apply this strategy to another type of qualified account, such as a 401(k) or 403(b), you’d first need to roll that account over into an IRA. You would want to discuss such a move with your financial advisor or tax professional.

If you are over 70.5 and own an IRA, and you’re going to make a charitable donation, please talk to your financial planner and tax advisor about using a Qualified Charitable Distribution. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your particular situation with a qualified tax advisor.

Please don’t hesitate to call us at 408-551-6100 or toll free 800-927-8314 and ask to speak with one of our financial advisors or send us an email.

Best Regards,

Retirement Capital Strategies
A Registered Investment Advisor
1190 Saratoga Ave, Ste. 140
San Jose, CA 95129
Tel (408) 551-6100


Source: This article was written by Margaret (Peggy) Stephan, CFP® – LPL Financial Advisor at Retirement Capital Strategies.

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