QCDs: A great way to gift wisely this holiday season

As we head towards the end of 2018, tax planning is a topic of increasing importance to many people. One question that comes up particularly often, especially in this time of changing tax laws, is “How can I lower the amount of taxes I owe?” If you’ve been taking required minimum distributions (RMDs) from an IRA, a qualified charitable distribution (QCD) may be just the thing for you.

What’s a QCD?

Essentially, a QCD is the utilization of RMDs from an IRA donated directly to a qualified charity. So, instead of taking the required amount of money and paying taxes on it, you can send that money to a great organization – and it’s tax free!

Rules and Regulations Part One

We’ve established that utilizing a QCD can be beneficial when it comes to saving money on taxes. However, like any good savings strategy, there are certain requirements that must be met in order to make a qualified charitable distribution. Let’s start with the basics.

First, you must have an IRA and be at least 70-1/2 years old, meaning you are subject to RMDs – the requirement to withdraw a minimum amount from your IRA each year.

Rules and Regulations Part Two

In order to qualify as a QCD, the distribution must go directly to a qualified charity or charities. Some local examples of these charities – known as 501(c)(3) organizations – include the following: the American Cancer Society, Boys & Girls Club of Greater San Diego, Father Joe’s Villages, and the San Diego Humane Society. Be aware, charities that do not work include private foundations, donor advised funds, or groups that support tax-exempt charities. The charity that you choose should not benefit you, as the donor, in any way.

In order to make a QCD, simply notify your IRA custodian of the funds you would like to transfer to the 501(c)(3) charity of your choice. You have the option of making QCDs to multiple charities during a tax year of up to $100,000. The threshold for married couples filing jointly is double this amount, so that each individual is able to distribute a total of $100,000.

Make sure that the funds you wish to donate come directly from the retirement account; if you withdraw the funds yourself and try to make the donation, this will not count for a QCD. The funds must be transferred from the IRA by the RMD deadline (typically December 31st).

So, what does making a QCD do for me?

Now, while we certainly enjoy giving, we also enjoy saving ourselves some money. Making a QCD from your IRA is a great way to do both of these things.

Making a QCD helps to lower your federal income tax bill since this donation is not taxed the way a regular RMD withdrawal would be. This can keep you from paying a higher amount of Social Security taxes, as well as help you to avoid the Medicare surtax since it reduces your taxable income when the amount used for the QCD is excluded.

Additionally, you don’t need to itemize for a QCD. Thus, even if you claim the standard deduction, you will still get a write off “above the line” by utilizing a QCD.

There are many ways to give while also being tax-smart. A QCD is just one of these. Contact a financial advisor today to see about setting up a QCD from your IRA!