Qualified Charitable Distributions

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If I were a betting man, I’d say there is probably a pretty good chance that you have recently put the finishing touches on your tax return. If I’m wrong, congratulations on getting your taxes done early! Your CPA thanks you, trust me. If I’m wrong because I just reminded you that your taxes are due on April 18th this year, save this post for later and make double sure that your CPA is filing you an extension!

Either way, while taxes are still likely fresh in your mind, I wanted to mention something to you for this year called Qualified Charitable Distributions. For those of us who do not like to type or write long words, we affectionately call them “QCDs.”

Qualified Charitable Distributions allow an IRA owner who is over age 70 ½ the opportunity to directly transfer up to $100,000 annually from an IRA to a qualified charity tax-free. QCDs are not new in the sense that they were created by Congress back in 2006 as part of the Pension Protection Act, but they have had a roller coaster history ever since. In the initial legislation, QCDs were only to exist for two years, and at the end of 2007, the opportunity to make QCDs was no more. QCDs became popular during that time period though, and almost every year since 2007, Congress hemmed and hawed over whether to bring them back each tax year or not. Some years they did, some years they didn’t, and some years they did retroactively (I wish I could do things retroactively…). To put it simply, it was a mess. Thankfully, as a result of the Consolidated Appropriations Act of 2016, QCDs are back, and for now at least, they are back permanently.

When a taxpayer makes a QCD, they don’t report taxable income for transferring money from their IRA and they don’t report a charitable deduction, either. It’s almost like it never happened for tax purposes. If a taxpayer just withdrew money from their IRA and donated it like normal, they would report the taxable income and they could take a charitable deduction. The taxpayer gets hit with the “stick” of the additional income, but receives the “carrot” of an additional deduction. So which should you do?

I’ll be honest with you, in most cases, the initial difference on your taxes from charitably gifting by making a QCD or not making a QCD usually appears pretty small, but that doesn’t mean you shouldn’t consider a QCD. By not having to report the additional income when you make a QCD, it’s possible you can avoid triggering or reduce the damage of some of the tax laws currently in place that penalize taxpayers. Charitably giving by making a QCD could reduce your income taxes on your Social Security benefits, it could reduce a phase-out of your itemized deductions, and it could keep your income under one of those heinous Medicare income thresholds so that your insurance premiums don’t increase. If you don’t have a lot of deductions and take the standard deduction instead of itemizing your deductions, a QCD is likely a good idea for you because otherwise you will be recognizing income and not having enough deductions to get any credit on your taxes.

I know that was a lot, and I’m sorry. I’m still a recovering CPA... My point is if you or someone you know is over age 70 ½, they have an IRA, and they are charitably inclined, make sure they ask their CPA about this new potentially tax-saving tool that we now permanently have in our taxpayer toolbox. Just do your CPA a favor, and ask them after April 18th!

-Tom