Financial Win-Win: Give to Charity and Avoid the Income Taxes on RMDs

Presented by Lucas Group Financial Advisors |

The tax code, with all of its hundreds of pages of regulations, stipulations, and loopholes always leave something be learned. Not only is the U.S. Internal Revenue Code massive, different write-offs and deductions occur at different stages in life, so it’s unsurprising if you don’t know the details of the IRA (Individual Retirement Account) Qualified Charitable Distribution (QCD). What is this magical option that allows you to give to your favorite charities without having to count the distributions as taxable income? Here are a few details to know before speaking with your financial advisor about how/if you should incorporate it into your financial roadmap.

First - What is a QCD?

A Qualified Charitable Distribution is a distribution from an IRA that goes directly to a qualified charity. When sending the distribution directly to the charity, you do not have to withhold income taxes, as neither you nor the charity will owe income taxes on the distribution. Therefore, the charity receives the full value of the distribution, whereas you would have only received a smaller amount net of taxes. Distributions made this way do count towards your Required Minimum Distributions (RMDs) for the year.

Donate by the Rules

The operations around a win-win QCD are pretty strict. The donation cannot be withdrawn and then dispersed to a charity; the donations must be sent straight (without pit-stops or bathroom breaks) to the public charity by the IRA administrator. Additionally, if a charity you donate to sends you any free goods or services, send them straight back. To be eligible for the tax-free benefit there should be no quid pro quo. And, be sure to get a written receipt of donation to every charity recipient. That means if you split $100,000 amongst five not-for-profits, you should have five written receipts of contribution—one from each.

Age Minimum

Like at the amusement park where you have to be a certain height to ride the roller coaster, you have to be a certain age to garner the benefits of the IRA charitable rollover…age 70.5 or older to be exact. (A tiny, yet important caveat to this, is this is based on the year—not the day—the taxpayer reaches that golden number of 70.5 years.) Even though the age for Required Minimum Distributions was increased to age 72 with the SECURE Act of 2019, QCDs are still allowed at 70.5. 

Rolling, Rolling, Rolling…Keep those Donations Rolling

The charitable rollover is advantageous because it allows taxpayers to give money to public charitable organizations (not donor-advised funds and private foundations except in rare circumstances) and that money isn’t included as part of your AGI (adjusted gross income). So, donations made through the IRA charitable rollover are therefore not subject to taxes.  The trade-off for the charitable rollover is the taxpayer then has to forego the charitable income tax deduction for that particular donation. However, you can still use QCDs even if you take the standard tax deduction (whereas the charitable deduction is only available when itemizing). 

Quantity Caps

$100,000 is an important number to remember as it’s the maximum amount a single donor can donate through Qualified Charitable Distributions annually. (If you’re married, the amount is not portable betwixt spouses.) Of course, you could totally donate more money to charities in any given year, but it wouldn’t be eligible to be a QCD.

Lastly, be sure to involve your trusted financial advisor and your tax advisor in the beginning stages of your intention to utilize the QCD. One major reason to involve your financial advisor is to ensure that the funds correctly go from the IRA to the charity directly. Additionally, QCDs still generate 1099-R tax forms, so it's important that your accountant is aware that this was a QCD and documents it properly on your taxes. Whether you’re looking at this as a legitimate option or simply planning ahead for the future, the experts will help you integrate the charitable distribution into your grand financial plan.


*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest.