For those tax payers who have reached the age where they are forced to take Required Minimum Distributions (at least age 70½ as of Dec. 31, 2019, or those who reach age 72 after this date), and who are also taking the standard deduction on their taxes, there is only one way to get a tangible tax benefit when you donate to charity.
The 2018 tax law change effectively doubled standard deductions for all filing statuses, thereby incentivizing most American to make use of the standard deduction instead of itemizing their taxes (itemizing taxes allows for the ability to deduct charitable contributions). This being the case, many Americans may be missing out on the deduction for the donations they are making to charity. Qualified Charitable Distributions (QCD), which are a direct charitable transfer out of an IRA, can help many Americans (who meet the previously mentioned age threshold) regain the tax benefit for charitable contributions. If you are not already making use of this, you may want to discuss further with your accountant.
A qualified charitable distribution (QCD) is a withdrawal from an individual retirement arrangement (IRA) that's made directly to an eligible charity. IRA account holders who were at least age 70½ as of Dec. 31, 2019, or who reach age 72 after this date, can contribute some or all of their IRAs to charity.1
It might seem counterintuitive that anyone would want to give their savings away after making contributions for years in anticipation of the day when they would retire, but there can be tax advantages for doing so.
You must begin taking required minimum distributions (RMDs) when you reach age 70 1/2 if you have a traditional IRA and if you reached this age before Dec. 31, 2019—even if you don't want or need the money at this time. These distributions are taxable at ordinary income rates.1 Otherwise, you have until you reach age 72 to begin taking RMDs.
How a Qualified Charitable Distribution Can Help
QCDs count toward your required minimum distribution for the year. If you have to take RMDs but you don't really want or need the money, QCDs can be a good way to distribute the minimum required amount out of the IRA and avoid the 50% excise tax penalty. As an added benefit, you'll avoid paying income tax on the distributions, as is required if you take the funds for your personal use.3
Any QCDs you make are considered to come out of taxable IRA funds first if you have basis in a nondeductible traditional IRA. Normally, distributions are split proportionately between taxable funds and nontaxable basis.4
Qualifying Rules for QCDs
You must be at least 70½ or 72 years old at the time you make a qualified charitable distribution, depending on when you reached age 70½.
The charity must be one that is approved by the IRS. You can't simply turn the money over to a friend or neighbor. Eligible charities include 501(c)(3) organizations and houses of worship. Donor-advised funds and so-called supporting organizations are not permitted to receive QCDs on a tax-advantaged basis.
The maximum amount that can be donated through a qualified charitable distribution is $100,000 per IRA owner as of 2020. This means that each spouse can donate $100,000 if you're married, but you can't "share" the limit. In other words, one spouse can't give $125,000 and the other $75,000. You're each separately subject to the $100,000 limit.2
Effect on Your Adjusted Gross Income
QCDs can be used to help keep your adjusted gross income (AGI) and taxable income within a desired range, because income from a charitable distribution "bypasses" your Form 1040. This can help prevent your income from reaching the thresholds for the net investment income tax and from disqualifying you from claiming other tax breaks.
These thresholds depend on your filing status, which is determined by factors such as whether you're married, widowed, or support one or more child dependents. As of the 2019 tax year, they are:
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Qualifying widow(er) with dependent child: $250,000
- Head of household (with qualifying person): $200,000
- Single: $200,000 6
The Rules Are Different for Roth IRAs
This rule applies only to traditional IRAs, not to Roth IRAs. It's possible to take a QCD out of a Roth IRA, but there's generally no advantage in doing so because Roth IRA distributions are already tax-free. You can't deduct contributions made to Roth accounts, so you've already paid taxes on those dollars you contributed.7
Roth IRAs aren't subject to RMDs, either (during the owner's life), so the more tax-efficient move might be to use a traditional IRA to fund the QCD if you have one.8
QCDs can't come out of SEP IRA or SIMPLE IRA plans, either, if they are ongoing plans.1
You Can't Claim a Deduction, Too
The key benefit of a QCD is that the distribution amount is not included on your Form 1040 as income, but there's a bit of a downside here, too.
The QCD cannot also be used as a deductible charitable contribution if you itemize your deductions. That would be something of a double tax break for the same transaction.5
A QCD has no effect on your ability to claim the standard deduction, however, and the Tax Cuts and Jobs Act effectively doubled standard deductions for all filing statuses beginning in 2018. Itemizing might be less advantageous for many taxpayers than it was in previous years anyway.
You would need more in overall itemized deductions than the standard deduction for your filing status to make itemizing worthwhile.
QCDs can benefit seniors who take the standard deduction rather than itemize because there's no tax benefit in making a donation to charity when you claim the standard deduction. You're not losing anything by making the QCD.
For non-itemizers, donating to charity via a direct transfer out of an IRA is the only way to get a tangible tax benefit from that donation.
The information contained in this article is not intended as tax advice and it is not a substitute for tax advice. Tax laws change periodically and the above information may not reflect the most recent changes. For current tax or legal advice, please consult with an accountant or an attorney.
- IRS. "IRA FAQs - Distributions (Withdrawals)." Accessed April 22, 2020.
- IRS. "Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs)." Accessed April 22, 2020.
- IRS. "Retirement Plan and IRA Required Minimum Distributions FAQs." Accessed April 22, 2020.
- Fidelity. "Qualified Charitable Distributions (QCDs)." Accessed April 22, 2020.
- Fidelity. "Donating to a Charity Using a Qualified Charitable Distribution (QCD)." Accessed April 22, 2020.
- IRS. "Questions and Answers on the Net Investment Income Tax." Accessed April 22, 2020.
- IRS. "Roth IRAs." Accessed April 22, 2020.
- IRS. "Retirement Topics — Required Minimum Distributions (RMDs)." Accessed April 22, 2020.