If you are 70 1/2 or older and retired, you might want to take advantage of a law that lets you pay less or no income tax on IRA withdrawals that go directly to a qualified charity. You can use this method even though you don’t have to take minimum distributions until you’re 72. They are called Qualified Charitable Distributions (QCDs), and you can use them to meet all or part of your minimum distribution requirement.
Here’s what I mean:
Let’s say the minimum amount you have to take out in 2022 is $22,000. If you donate $15,000 to a qualified charity in 2022, you would need to take out another $7,000 to meet your required minimum distribution for 2022.
Starting the year you turn 70 1/2, whether you are still working or not, you must take RMDs (required minimum distributions) every year. The RMD for each year is found by dividing the amount in the IRA account as of December 31 of the previous year by the distribution period or expected life span. Your Roth IRAs don’t have to follow this rule.
QCD stands for “Qualified Charitable Distribution.”
Most of the time, a qualified charitable distribution (QCD) is a tax-payable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) that is paid directly from the IRA to a qualified charity. The person who owns the IRA must be at least 70 1/2 years old.
How do you play?
In contrast to most tax rules, the rules for QCDs are pretty simple:
• You must be age 70 1/2 or older
• The QCD must come from a traditional IRA, Roth IRA, or individual retirement annuity. It can’t come from a simplified employee pension, a simple retirement account, or an inherited IRA.
• The qualified charitable distribution (QCD) must be a direct transfer from the IRA trustee to the charity.
• The organization must be one that a person can take a tax deduction for on his or her income tax return (i.e., that gives out grants)
• The organization must acknowledge the donation, just like a tax deduction for a charity or a donor-advised fund.
QCDs have tax benefits
Even if the money is given to charity, taxable IRA distributions must be counted in the adjusted gross income (AGI). You might be able to deduct a charitable donation, but you might be limited to 50 percent of your adjusted gross income. This means you wouldn’t be able to deduct the full amount in that tax year and might have to pay income tax on the difference.
QCDs get around this problem because they aren’t taxed and the full amount can be used as a charitable deduction.
This also means that there is no change in your AGI that could make your taxes on Social Security income go up or make your Medicare insurance premiums go up. It could also lower the amount you can deduct for medical expenses, which can’t be more than 7.5% of your AGI.
And because there is no increase in income, you may be able to take the standard deduction (which is often a higher dollar amount and more beneficial than itemizing) and claim the deduction for a charitable donation.
The annual limit of $100,000 means that you can use a QCD for as many years as you want. It also applies to the IRAs of each partner. So, a couple could give up to $200,000 ($100,000 each) in a given tax year and still get the exclusion.
Putting down a QCD on your tax return
Form 1099-R is used to report charitable distributions for the year in which they are made. By January 31, 2023, you should have Form 1099-R. On your Form 1040 tax return, you report a qualified charitable distribution by putting the full amount of the donation on the line for IRA distributions. On the line for the taxable amount, write “0” and “QCD” if the whole amount was a qualified charitable distribution.
You must also file Form 8606, Nondeductible IRAs, if the qualified charitable distribution came from a Roth IRA or a traditional IRA in which you had a basis and from which you took a distribution other than the qualified charitable distribution in the same year.
Don’t be afraid to call if you want more information about qualified charitable distributions or if you have questions about IRAs, minimum required distributions for IRAs, or how this affects your taxes.