Effective tax and estate planning often includes a plan for charitable giving. We help families and high net worth individuals develop charitable planned giving strategies.
For assistance and counsel on establishing a charitable plan, please contact our attorneys in the Private Client Services practice. We are happy to meet with you and help you put a plan in place to achieve your philanthropic goals.
For those with a charitable plan in place, it is important to remember that there are IRS requirements that take effect when you turn 72 years old. At that time, the IRS requires you to take Required Minimum Distributions (RMD) each year from your tax-deferred retirement accounts. A Qualified Charitable Distribution (QDC) allows an individual to satisfy all or a portion of the RMD, while also decreasing your annual income tax liability and contributing to your favorite charity.
What is a Qualified Charitable Distribution?
A QCD is made when funds from an IRA are directly transferred to a charity classified as a 501 (c)(3) organization. Charities such as private foundations and donor-advised funds are ineligible to receive QCDs. Failure to move funds directly from an IRA account to the charity will also result in an ineligible transfer; an individual may not withdraw the funds him or herself and then transfer to a qualified charity. An IRA owner must be age 70 ½ or older to make a tax-free charitable distribution. The maximum annual amount that can qualify for a QCD for an individual is one hundred thousand dollars ($100,000).
A QCD is not recognized as taxable income and can reduce your Adjusted Gross Income (AGI), allowing an individual or household to remain in a lower tax bracket. A lower AGI can potentially offset increases to Medicare premiums and taxes on Social Security benefits. In 2017, the federal government increased the standard deduction. By electing the standard deduction, however, taxpayers are unable to itemize charitable donations. A QCD allows you to reduce your AGI through a charitable donation while using the standard deduction.
How to Report a QCD?
At the end of the year, you will receive a 1099-R form from your IRA Administrator. The QCD will be included with all other taxable distributions. It will be important to notify your tax preparer which portion of your IRA distributions were done as a QCD to prevent an unintended taxable event. When you file your Form 1040, you report the total IRA distribution on line 4a. On line 4b enter “QCD” to indicate any part of the distribution that qualifies as a QCD, which will not be taxable.
With an effective plan in place including qualified charitable distributions, you can implement your charitable plan while managing your tax liability.
For more information about charitable planned giving, trust and estate planning and tax planning, contact our attorneys in the Private Client Services practice at Wilchins Cosentino & Novins. We welcome the opportunity to assist you in developing plans and implementing strategies to achieve your philanthropic goals.
This article is not legal advice and should not be taken as such or relied upon as legal advice.