Qualified charitable distributions can reduce taxes

Using an old adage,

“you can have your cake and eat it too,” there are several ways contributions to charity might also reduce your tax burden while benefiting causes you support. One of these is a Qualified Charitable Distribution sometimes referenced as a QCD.

Qualified charitable distributions can use the federal tax code to benefit taxpayers — mostly in the upper income brackets — who are older and must take Required Minimum Distributions (RMDs). Explaining required minimum distributions and who they affect has become somewhat more complicated recently with the passage of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) which went into effect on Dec. 20, 2019. Here is how this works and how qualified charitable distributions might help.

If you hold one or more traditional (not Roth) Individual Retirement Accounts (IRA’s) or similar tax qualified funds (such as SEP IRA, SIMPLE IRA or 401(k) or 403(b)), you reach a point when you are required by the federal government to begin to withdraw money in specified amounts (the RMD) from the account. If you reached the age of 70½ in 2019 or earlier for IRA’s, you must take your first required minimum distribution by April 1, 2020. If you reach age 70½ in 2020 or later you must take your first required minimum distribution by April 1 of the year after you reach 72.

Taking the required minimum distribution adds these funds to your taxable income which can have the unwelcome effect of potentially pushing you into a higher income tax bracket. It might also limit or eliminate some types of tax deductions such as personal exemption and itemized deductions and sometimes trigger higher taxes on Social Security income. So, even if you do not want or need the distribution from the account, you are required to take it and count it in your income. There is a substantial penalty if you do not do so.

A qualified charitable distribution is one way a charitable contribution can help. Here is how.

A qualified charitable distribution can allow individuals who are required to take required minimum distributions to donate up to $100,000 total to one or more charities directly from a taxable IRA without the funds being counted as part of their income. Because qualified charitable distributions do not increase taxable income, high tax rates, phaseouts, and other unpleasant effects of receiving the required minimum distributions into income can be avoided or reduced in effect.

Since the qualified charitable distribution also reduces the overall balance in the IRA, it also potentially can decrease the required minimum distribution required to be taken in subsequent years. Qualified charitable distributions are not counted toward the maximum amount deductible as charitable deductions for those who itemize on their tax returns and might allow more charitable gifting. Funds are transferred directly to the charity and not through the IRA owner.

As can be imagined, actions taken need to be taken with professional advice to assure you comply with all the requirements. Here are some questions.

WHEN DO YOU NEED TO COMPLETE THE QUALIFIED CHARITABLE DISTRIBUTION? » If you want to make a qualified charitable distribution count toward your minimum annual IRA distribution it must be made by Dec. 31 of the tax year in question.

WHAT KIND OF CHARITABLE CONTRIBUTIONS COUNT? » Not all charitable contributions necessarily count. As reported by www.fidelitycharitable.org,

“Currently, QCD’s cannot be made to donor-advised fund sponsors, private foundations and supporting organizations, though these are categorized as charities…” The site then states — “NOTE >> Donors should check before making a gift to ensure the organization is qualified to accept QCDs…” In other words do not attempt to do this without further investigation or without the support of professionals who know what they are doing.

IS A QUALIFIED CHARITABLE DISTRIBUTION ALWAYS THE BEST ANSWER? » There are many alternatives for charitable giving that could apply in a given case. For instance, as the article cited indicated, if you prefer to take a tax deduction in the current year and then decide on the specific charities later, a donoradvised fund might make more sense. Alternatively, you might decide to donate highly appreciated assets directly. WHAT KIND OF CHARITIES

MIGHT BENEFIT BY A QUALIFIED CHARITABLE DISTRIBUTION? » You might check with your church as one possibility or any number of worthy 501(c) (3) charities. Just make sure they qualify (see above) and that it is the best choice of charitable giving for you. Again, consult with your CPA or financial advisor who is familiar with the process.

Janet Colliton, Esq. is a Certified Elder Law Attorney by the National Elder Law Foundation recognized by the Pennsylvania Supreme Court and the American Bar Association and limits her practice, Colliton Elder Law Assocs, PC, to elder law, special needs, guardianships, estate planning and estate administration with offices at 790 East Market St., Suite 250, West Chester, 610-436-6674, colliton@collitonlaw.com. She is a member of the National Academy of Elder Law Attorneys and, with Jeffrey Jones, CSA, co-founder of Life Transition Services, LLC, a service for families with long term care needs.