Donating to the church using a Qualified Charitable Distribution (QCD)
can result in significant tax savings.
NEWS ABOUT YOUR INDIVIDUAL RETIREMENT ACCOUNT (IRA):
If you are age 72 or older, the IRS normally requires that you take A REQUIRED MINIMUM DISTRIBUTION (RMD) each year from your tax – deferred retirement account(s). However, as part of THE COVID 19 CARES Act, Congress has waived the RMD for 2020 which will reduce your taxable income by the amount you would have received from the RMD. Taxpayers that do not need cash from their IRA in 2020 can elect to leave that money in place this year on the hope there will be a rebound in the market thereby increasing the value of their account. If you wish not to take the RMD for 2020, we suggest you confirm this with your IRA custodian soon as possible. Please also be aware that RMD’s will be reinstated FY2021.
WHAT IS A QUALIFIED CHARITABLE DISTRIBUTION (QCD)?
A QCD is defined as a transfer of funds from an Individual Retirement Account (IRA) direct to a qualified charitable organization. QCD’s are arranged through the person’s IRA custodian or fiduciary and the gift is made payable direct to the charity. QCD’s can be used by taxpayers over the age of 70 ½ that have a traditional IRA account and who make charitable contributions.
WHAT ARE THE TAX ADVANTAGES OF MAKING A QCD?
Funds withdrawn from an IRA are typically taxed as regular income. The effect of this income (RMD or other withdrawals) may push you into a higher tax bracket and reduce your eligibility for certain credits and deductions.
Funds withdrawn from an IRA as a QCD are NOT COUNTED as income and therefore
lower your overall income and tax liability. A lower taxable income may also serve to lower taxes paid on Social Security benefits and further reduce your tax liability.
The current high Standard Deduction now prevents many taxpayers from itemizing and deducting their charitable contributions.* This is what makes using a QCD to donate to your charity attractive and beneficial. See example of QCD tax saving potential below.
*Note: For 2020 only, IRS WILL allow taxpayers to deduct up to $300 in charitable contributions even if they do take the Standard Deduction.
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- EXAMPLE: The example below makes the following assumptions:
o Taxpayer (TP) and spouse are over 70 ½ and have an IRA
o They will withdraw $5,000 from IRA for donation to church
o They will take the Standard Deduction in 2020 ($27,400)
o Their estimated 2020 taxable income is $50,000. ($45,000 from other sources + $5,000 from IRA withdrawal)
- EXAMPLE: The example below makes the following assumptions:
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- Scenario 1: TAXPAYER DOES NOT USE QCD
▪ Withdraws $5,000 from IRA and deposits to checking account
▪ Writes $5,000 check to church from checking account
▪ 2020 Taxable Income (before Standard Deduction) = $50,000
▪ 2020 Taxable income after Standard Deduction = $ 22,600 ($50,000-$27,400)
▪ Federal Income Tax on above = $2,317
- Scenario 1: TAXPAYER DOES NOT USE QCD
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- Scenario 2: TAXPAYER USES QCD
▪ Instructs IRA custodian to make $5,000 QCD to church
▪ 2020 Taxable Income (before Standard Deduction) = $45,000 ($50,000 – $5,000 QCD)
▪ 2020 Taxable income after Standard Deduction = $17,600 ($45,000-$27,400)
▪ Federal Income Tax on above = $1,760
By using a QCD, taxpayer saved $557 ($2,317-$1,760). And QCD savings increase as Taxable Income Increases.
TIPS FOR MAKING A QCD
• Contact the custodian or fiduciary of your IRA well before your RMD or QCD will be made.
• Specify gift amount, charity name, and charity mailing address.
• Be certain to have your name and the directions for your gift (Tithe, Building Fund, etc.) be noted on the check and / or documentation that will be sent to your charity.
• Inform your tax preparer and your charity that you are making a QCD.
• Want help with the QCD process? Need clarification on 2020 tax rules? Contact a TPC Certified Tax Counselor.TPC Treasurers Bud Ward and Floyd Smith are Certified IRS Volunteer Tax Counselors with AARP Tax-Aide. Contact them by completing the form below.
Contact TPC about QCDs
Please complete the form below with your question for our treasurers. - Scenario 2: TAXPAYER USES QCD