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Qualified Charitable Distributions

Are you over 70.5 with a Required Minimum Distribution (RMD) that exceeds your income needs (and/or that you might like to exclude from your taxable income)? Do you have charitable interests that you intend to contribute to throughout the year? Lucky you!

It's relatively well known that contributions to charity may be deductible on an individual's tax return, although the details of how to take advantage of such a deduction are likely a touch murky to the average Jane. One thing that Congress did in 2006, albeit the initial intention was to do so temporarily, was to make a provision that allowed money from a RMD to be sent directly to a charity, both satisfying the RMD and avoiding the money’s inclusion in an individual's gross income (which can reduce some of the complication, the overall tax burden, and may even give Jane the ability to take the standard deduction if she doesn't have enough to itemize – another potential tax benefit). Such a distribution is called a Qualified Charitable Distribution (QCD).

Fast forward a couple of years, the Great Recession happens, Congressional dog-and-pony show happens, and, to quote the famous saying on Seinfeld…yada yada yada… after multiple extensions, the Qualified Charitable Distribution (QCD) was made permanent in 2015.

Basic mechanics of the alternative are – if Jane makes an IRA distribution and receives the money first, she includes that amount in her gross income, and then deducts the amount used as a charitable contribution (assuming she itemizes and to the extent that it doesn't exceed certain limits set on adjusted gross income (AGI), and, if it does, potentially carry over the excess for up to five years). See, it seems easy. But in actuality, with all of the moving parts, such a method could mean a higher AGI, which can lead to a higher tax rate on other income, paying taxes in the present on a charitable contribution that you can't deduct until sometime in the future, etc. Surprising, right?

A QCD has some distinct advantages versus distributing and subsequently deducting charitable contributions. The really interesting thing about this is how this can affect people with either minor or major charitable contributions. Although the maximum limit is $100,000 per year per person, there is no minimum, so any dollar amount contributed to charity could effectively be excluded from your taxable income assuming it is sent properly. Say, for example, you give money to your church every week in a standard contribution amount and that amount happens to be from income that you receive from your IRA. With a QCD there is a way to send the money directly to the church from the IRA, removing yourself as the middle gal and getting a potential tax benefit. It’s important to note that you don't also get to deduct the QCD amount as a charitable contribution on your federal income tax return.

The implications of such a rule are relatively far reaching and, although the idea is relatively simple, it makes sense to be sure it has been executed properly and, ideally, that it meshes with your entire financial plan. So if you need help building a plan, executing a strategy, or, yada yada, just give us a call.

This information is provided for educational purposes only and is believed to be accurate. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or financial services professional. The concepts presented may not be suitable for every situation. Waddell & Reed does not offer tax or legal advice.


07/17