IRA Qualified Charitable Distributions

QCD vs Rollover

Understand the benefits and increase your value to donors.

First let’s clarify any confusion in nomenclature. Sometimes the IRA Qualified Charitable Distribution is referred to as an IRA Rollover gift. This is a sloppy and misleading term, because an IRA Rollover is another distinct process. Better to use the term IRA Qualified Charitable Distribution (QCD).

The mechanics of the IRA QCD gifting technique are straightforward:

People who are 70 1/2 or older can transfer gifts of up to $100,000 annually directly from their IRA to a church or 501(c)3 charity. These gifts count towards the donor’s Required Minimum Distribution (RMD) but do not increase the donor’s income. The QCD cannot go towards a charitable gift annuity, a donor advised fund, a foundation or a supporting organization. NOTE that the SECURE Act recently changed the age requirement for RMDs to 72, however QCDs are still allowed at age 70 1/2!

There are three distinct strategic benefits for your donors who use the IRA QCD.

  1. People who take the standard deduction receive no benefit from their charitable gift. In effect, they pay taxes on their gifts. The IRA QCD fixes this.
  2. Generous donors who itemize can reduce their taxable income and may further benefit by switching to the standard deduction.
  3. Making an IRA Qualified Charitable Distribution may reduce the donor’s provisional income. Provisional income is a measure used by the IRS to determine whether or not recipients of Social Security are required to pay taxes on their benefits. It is calculated by adding up a recipient’s gross income, tax-free interest, and 50%of Social Security benefits.

The third benefit is complicated because it involves the formula for taxation of social security and certain trigger points where up to 85% of social security can be taxable.

Some people have to pay federal income taxes on their Social Security benefits, pensions, RMDs” immediately before “and other taxable income”. This usually happens only if they have other substantial income in addition to their benefits (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return).

Few people do their taxes on paper so they don’t understand that their Required Minimum Distribution can push more of their social security benefits into the taxable range. Effectively your RMD may cause a double taxation effect. Someone in a 22% tax bracket may pay 40.7 %tax because of their RMD. As a development professional, you can suggest that donors ask their tax advisors how charitable gifts may improve their income tax burden.

What if the donor has a 401K, 403B, or Keogh instead of an IRA?

Suggest your donors consult their financial advisors about creating a new IRA as a vehicle for charitable giving. Then they can transfer their desired gifting amount into the new IRA and use this account to make QCDs.

In a future issue I will explain the incredible benefits of the IRA rollover for higher income families—entirely different, but equally important.

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