Using the Qualified Charitable Distribution
During one's working years, the vision of retirement may seem blissfully simple. Pay off the mortgage. Live comfortably on a modest income. Support charities with time and financial resources. This would seem to imply little to no tax burden, but Uncle Sam has different ideas. Retirement Account required minimum distributions begin at age 72, and coupled with social security benefits, retirees often find themselves with six figures of taxable income. With the mortgage paid off, a cap on the deduction for state and local taxes, and a higher standard deduction, many retirees are also surprised that charitable contributions no longer reduce their tax bill.
A solution for these two annoyances, for those over 70.5 years of age, is the qualified charitable distribution (QCD). Individuals can make a charitable distribution directly from their IRAs to a qualifying charity. Funds distributed in this manner are considered non-taxable distributions, but they still count towards the required minimum distribution for the year. The tax effect is even better than claiming a charitable contribution as an itemized deduction, because it allows taxpayers to reduce their adjusted gross income -- an important number that's used in many places on the tax return, and also determines one's Medicare premiums for the upcoming year.
Using a QCD would seem like a no-brainer, but there are a few caveats. First, making distributions directly to a qualifying charity is less convenient than simply writing a check, so it's best to use QCDs for a few large contributions. With that in mind, it may seem tempting to make a single distribution to a donor-advised fund. However, donor advised funds are not qualifying charities for the purposes of making a QCD. Finally, tax documents will lump QCDs and taxable distributions in the same bucket, so it's incumbent on the taxpayer to keep careful records in order to handle the QCD properly at tax time.
While a QCD is more work than the average charitable contribution, the potential rewards are also greater. For individuals over 70.5 with a charitable mindset, the QCD is a useful tool to have in the toolbox.