Everyone has that one friend or family member who complains about problems that aren’t really problems. I used to know a woman whose parents-in-law paid for everyone in the family to go on vacation every year to some fabulous place. The problem: She didn’t always like the place.
Hmmmm….. Not a bad problem to have.
Another problem that some fortunate people over 70½ years old have is Required Minimum Distributions (RMDs).
An RMD is a forced distribution from an IRA for those over age 70½. The dollars contributed to the IRA were (usually) not taxed and the earnings have never been taxed.
Eventually the government wants its share. So the rule is you must take distributions starting at age 70½. In most cases these Required Minimum Distributions (RMDs) are fully taxable.
The problem some people have is they don’t need the RMD money and they don’t want to pay the tax.
File that under “not a bad problem to have”.
You can learn more about RMD’s HERE.
One possible solution to this problem is to make a tax-free Qualified Charitable Distribution (QCD) from your IRA to your favorite qualified charity. Recent changes to tax law have made QCDs a more attractive option for many. You help a charity you believe in and you save on taxes – win win!
Things to know about Qualified Charitable Distributions (QCDs):
- You must be age 70½ at the time of the distribution. So if you turn 70 on March 1st, you have to wait until September 1st to make the QCD.
- The QCD must be from a Traditional or Rollover IRA, not a 401(k) or other employer plan.
- The QCD must go to a qualified 501(c)(3) organization, eligible to receive tax-deductible contributions. (Note: Private foundations and Donor Advised Funds do not qualify)
- The usual rules regarding charitable deductions apply – you must not receive anything of value in return for your contribution to the charity.
- For my clients, my firm’s custodian will make a check out to the charity and mail it directly to the charity. Other custodians will make a check out to the charity and mail it to you, the IRA owner. Then you must send to the charity.
- It does not work if the check is made out to you. Call your IRA custodian for their specific QCD process.
- You can choose more than one charity.
- The maximum is $100,000 per taxpayer, you are not limited to your RMD amount. There is typically no minimum amount or fee.
- The deadline is December 31st, ideally the charity should cash the check by then. So don’t wait until the last minute to put this in motion.
Now for the tax details:
- Let’s say your Required Minimum Distribution (RMD) for the year is $10,000. You decide to have $7,000 sent to a qualified charity as a QCD and take $3,000 for yourself. Only $3,000 is taxable.
- Your 1099-R tax form from the custodian does NOT indicate QCD. It is imperative that you tell your tax preparer how much went directly to the charity. This is reported on line 11 of your Form 1040 with the abbreviation QCD.
- You cannot take the QCD as an itemized deduction. (That would be “double dipping”). Due to Tax Reform many taxpayers will be taking the standard deduction and not itemizing their deductions, so the QCD is a better option. You can learn more about standard vs itemized deductions HERE.
- The QCD lowers your Adjusted Gross Income which may reduce your Medicare premiums and also may reduce the amount of your Social Security that is taxable.
A Qualified Charitable Distribution can be a great tax savings tool for anyone over 70 1/2 with an IRA who has a favorite charity. But like most everything in the tax code, the devil is in the details, and the potential benefit depends on number of factors. A qualified tax professional can help you sort out the details.