The Benefits of Charitable Giving Using Your IRA

November is a time of giving thanks. Not only do we celebrate Thanksgiving, but after Black Friday, Small Business Saturday and Cyber Monday, there is Giving Tuesday on November 28th this year.

Many charities will benefit from gifts made on Giving Tuesday, and some will also offer matching funds for gifts made during Giving Tuesday. The Fairfield County Foundation will hold their 34-hour give, which provides matching funds to gifts made during that time.

While many give without regard to whether the gift is tax deductible, taking advantage of tax benefits may allow you to give more, or not have the charitable gift cost you as much.
In a prior article, July 31 Summer Tax Checkup, discussed bunching itemized deductions, including charitable donations for tax benefits. Today’s article will focus on the advantages of making Qualified Charitable Distributions (QCD) from your IRAs.

Three Basic Rules for Making a QCD

• Individuals must be 70 ½ years old or older
• Individuals can donate up to $100,000 per year to a qualified charity
• The donation must come directly from a taxable IRA

If you qualify, there are really no downsides to using a QCD to make your charitable donations.

The big advantage?

The amounts donated to charity using a QCD also count as part of your Required Minimum Distribution (RMD) so the QCD is removed from your taxable income.

How does a QCD work?

Required Minimum Distributions

Beginning at age 73, you are required to make withdrawals from your Traditional IRA, even if you don’t need or want the funds. This required minimum distribution increases the IRA holder’s total taxable income. This income could potentially push the taxpayer into a higher income tax bracket, it can often trigger higher taxes on Social Security income, and even higher Medicare premiums.

Qualified Charitable Distributions

Qualified Charitable Distributions (QCDs) allow individuals to fulfill their required minimum distribution by a direct transfer of up to $100,000 to one or more qualified charities.. The distribution counts towards your Required Minimum Distribution (RMD), and is not taxable which reduces your federal and state tax. Your charitable gift reduces your federal tax obligation, even when you don’t itemize your deductions.

Qualified Charitable Distributions can be made only to certain Qualified Charitable Organizations, as defined in the tax code. Currently, QCDs cannot be made to donor-advised fund sponsors, private foundations and supporting organizations, though these are categorized as charities.

The Fairfield County Foundation is a community foundation, not a private foundation. When you are giving to an organization such as the Fairfield County Foundation the donation will qualify if made to many of their funds, but not if the donation is to a donor-advised fund that you have established.

Another example of an exception would be brokerage firm-offered funds that are “charitable donor-advised funds.”

If you are not sure or have questions, discuss with your tax professional or the staff at the organization you are donating to. You don’t want to make the donation thinking it should qualify as a QCD, and find out at tax preparation time that it does not.

What Documentation Do I Need if I make a QCD?

The 1099-R you receive at tax time will report the total distributions from your IRAs and will not list or remove the amount that went to charity. For example, if you withdraw $50,000 in a year and $20,000 is for a QCD, the form will still report $50,000 in total distributions, even though only $30,000 is taxable income. You must:

  • Keep track of the amount that went to the charitable organization
  • Obtain a receipt from the charity
  • Keep documentation showing the amount that went directly from your IRA

Talk to your tax advisor to see how a QCD may benefit your specific situation. Consider making a QCD, especially on Giving Tuesday or during the 34-hour Give or another matching event.

The information contained in this article is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional for your specific situation.

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Profile photo of Penny Wasem, CPA, CFP, PFS, owner of Lifetime Financial Planning Solutions in Lancaster, Ohio.

By Penny Wasem, CPA, CFP, PFS

Penny L. Wasem is the owner of Lifetime Financial Planning Solutions, LLC. A summa cum laude graduate of Ohio University, Penny earned a Bachelor of Business Administration with focus in accounting and mathematics. She serves on the board of The Fairfield Medical Center Foundation, is a member of the Investment Committee of The Fairfield County Foundation and has been active on many non-profit boards in the community. Penny lives in Lancaster with her husband Eric Hubbard and is parent to Clark and Olivia Hubbard.