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QCDs: Charitable donations with a (positive) twist

Volunteer Work is For EveryoneWe’ve discussed the benefits of charitable contributions previously. Not only have many people benefited from a financial perspective, but from having a positive social impact as well.

Now, many people are realizing that current tax laws plus the increase in standard deductions could result in some changes. Mainly that the tax benefits of charitable contributions, for some, may no longer exist. The standard deduction for many people may now be greater than itemized deductions, which could effectively eliminate the deductibility of charitable donations.

There is  a possible way to make the donation and still potentially save on taxes and it’s called a QCD, also known as a qualified charitable distribution. If you have an IRA and are age 70 1/2 or greater, you can have money sent directly to your favorite charities from your IRA. This is money that would otherwise be taxable, and I’ll explain further as we go on.

What is a required minimum distribution?

Once you reach age 70 1/2 the IRS mandates what is called a Required Minimum Distribution (RMD) from your IRA. A formula that uses your life expectancy and the value of your IRA at the end of the prior year is used to determine the amount. If this minimum is not taken, there is a penalty.

How a qualified charitable distribution (QCD) works

Making a qualified charitable distribution, rather than taking a required distribution and then making the donation with that money, can be advantageous.

Here’s why: IRA distributions such as a required minimum distribution must be included in adjusted gross income (AGI). This could result in increased taxes on social security and also increase Medicare insurance premiums. Other AGI limitations on itemized deductions may also be affected. In contrast, a qualified charitable distribution excludes the amount that is donated from taxable income.

Senior CitizensAm I able to make a QCD?

QCDs are a great benefit to many donors but be mindful of the requirements. A QCD of up to $100,000 per year can be made, regardless of the RMD amount. The donor must be age 70 1/2 or greater at the time the gift is made. If an individual turns 70 ½ in June, but made the QCD in February, the QCD does not qualify — even though it was made in the year 70 ½ was reached. You may want to speak with a tax advisor and/or CPA to see if you are qualified to make a QCD and if it’s right for you.

New tax laws don’t mean you have to be less generous

Some say that current tax law will cause Americans to be less generous. I don’t agree — and here’s why. About two thirds of American tax payers who give to charities don’t itemize when they complete their taxes. Larger donors will still itemize. Higher income taxpayers ($261,500 single and $313,800 joint filers) should note the new law removes the Pease limitation from the tax code. This may provide additional incentive for making charitable contributions.

QCDs: Qulified Charitable DistributionsWe give about 2% of our country’s GDP to charity. On average, charitable donations have equaled about that same percentage of GDP for 50 years or so — despite numerous tax law changes over the years.

A QCD can be personal, too

Whether we are writing a check, using a credit card, giving cash or a donation in kind, the primary motivation for doing so is the hope of making a positive change in our world… not necessarily how it looks on a balance sheet. This means it’s likely valuable to you to have a connection to your charity.

If a QCD makes sense to you, but you don’t want to miss the thrill of providing the check yourself — we have a solution — speak to a financial advisor for more information! The check from your IRA can be made payable directly to the charity, then given to you. This way, you can still experience the excitement and joy of delivering your gift in person.

July 2018

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

 

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