Using your RMD to make a QCD
When you are planning for the rest of the year, you may want to discuss with your tax professional the possibility of making a Qualified Charitable Distribution (QCD) from your IRA. This distribution can be counted toward your total Required Minimum Distribution (RMD) for the 2019 tax year. The QCD you make directly to a charity counts toward your RMD and it is not a taxable distribution. Your QCD must be made by December 31, 2019 to take advantage of the deduction for 2019.
Who can make a QCD?
Almost all IRAs are eligible for QCDs, but there are a few things to keep in mind.
- RMDs are only required once you hit 70 ½ years old, so you will need to be 70 ½ or older to take advantage of this.
- You can make a yearly transfer directly from your IRA up to $100,000 for single ($200,000 for married filing jointly (MFJ)). If you choose to donate more than the maximum, the excess is taxed as ordinary income. The amount in excess does not count toward your total RMD for the year.
- While most all IRAs are eligible for QCDs; Traditional, SEP and SIMPLE IRAs are where you will get the biggest potential benefit. You can make QCDs from a Roth IRA, but the distributions are already taken out tax-free, so you will not receive the intended benefit of this transaction.
Who can I give to?
You can send a donation to a 501(c)(3). You must follow the same rules for “tax-deductible” contributions that you do for QCDs. Private foundations, donor-advised funds, and public charities do not qualify. If the distribution is made payable to you, then it will not count as a QCD.
Benefits of making a QCD
You will receive a bigger benefit (tax savings) by contributing from your IRA than itemizing on Schedule A.
Something else to keep in mind, your taxable income plays a part in determining how much your Social Security income is taxable. Using part of your RMD as a QCD will assist in lowering your taxable income and save taxes paid on Social Security income.
You will still be receiving a 1099-R for this distribution, but it will show up as a QCD instead of a taxable distribution. Since the QCD is not taxable, you are not able to claim the charitable deduction on your Schedule A. You will still receive a letter from the qualifying charity representing the date and amount given.
Here Are Some Examples
Consider these scenarios for taxpayers who do not itemize. The taxpayers file married filing joint with income of $100,000. They normally take the standard deduction ($24,000) and contribute $10,000 a year to a charity. They are in the 12% tax bracket.
Scenario 1: No QCD – All of their RMD is taxable. They do not receive any benefit from donating to a charity since they do not itemize (they are taking the standard deduction). Federal taxes = $8,739
Scenario 2: QCD – $10,000 of their RMD is not taxable since it was contributed directly to a charity. The taxpayers still get the full $24,000 as a standard deduction and would save $1,200 ($10,000 x 12%) in taxes. Federal taxes = $7,539
Now consider scenarios for taxpayers who itemize. The facts are the same as above, except the taxpayers itemize their deductions totaling $29,000 (which includes $10,000 donated to charity).
Scenario 3: No QCD – All of their RMD is taxable, but since they itemize they get the deduction of $29,000. Federal taxes = $8,139
Scenario 4: QCD – The amount of the QCD is not included in their income, which reduces gross income to $90,000. They no longer have the charitable deduction (since it was taken as a reduction to income), so itemized deductions now equal $19,000. The taxpayers would take the standard deduction since it is greater than itemizing. Taxable income is now $61,000. Federal taxes = $7,539
As always, please consult your hb&k advisor if you have any questions and to help you determine if this is best for your situation.