Qualified Charitable Distributions (QCDs)

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Funds withdrawn from an IRA are typically taxed as regular income.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Funds withdrawn from an IRA as a QCD are NOT COUNTED as income and therefore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.

EXAMPLE: The example below makes the following assumptions:

• Taxpayer (TP) and spouse are over 70 ½ and have an IRA
• They will withdraw $5,000 from IRA for donation to church
• They will take the Standard Deduction in 2020 ($27,400)
• Their estimated 2020 taxable income is $50,000. ($45,000 from other sources + $5,000 from IRA withdrawal)

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 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.