With the recent changes to the tax code, you might be wondering how your charitable contributions will be affected. Will you still be able to write them off? What happens if you don’t itemize?
Although, yes, fewer people will itemize in the coming year, you can still use charitable contributions to reduce your tax bill. If you’re 70.5 years old, you can withdraw the money from your Individual Retirement Account (IRA), donate it to a charity — and not pay taxes on it.
These donations are called qualified charitable distributions (QCDs), and they’re a great tax strategy for retirees.
What Qualifies As a QCD?
For your charitable donation to qualify as a QCD, you must:
- Be 70.5 years old
- Withdraw the money from an IRA — 401(k)s are not eligible
- Give the money to a registered 501(c)(3)
- Take out less than $100,000 per year
The 2 Big Advantages of Using a QCD
Wondering why you’d want to donate to a charity using a QCD, instead of just writing a check from your bank account? Here are two big reasons.
#1: You won’t pay taxes on QCDs
When you withdraw money from a regular IRA, it’s usually taxed at your current income rate. But even though they’re coming from your IRA, QCDs don’t count toward your taxable income. While this has always been a perk, it’s even more valuable in light of last year’s Tax Cuts and Jobs Act.
Now that the standard deduction has nearly doubled — to $12,000 for singles and $24,000 for married filers — it’s more likely you’ll be taking that instead of itemizing.
And without itemizing, you normally wouldn’t enjoy a tax advantage from making charitable contributions. But if you take a QCD, you’ll lower your taxable income for the year — whether you take the standard deduction or not.
#2: QCDs count toward your required minimum distributions (RMDs)
As you probably know, once you turn 70.5, you must take RMDs (withdrawals) from your IRA each year. If you don’t, you’ll pay a stiff penalty: a tax of 50 percent on whatever you failed to withdraw. (You definitely want to avoid doing that!)
So, if you don’t need the money — and also want a tax break — a QCD is a smart choice. You don’t pay a high penalty tax, you lower your taxable income, and your favorite charity gets a generous donation. We’d say that’s a win-win-win.
How to Write a QCD Check
Ready to make your first QCD? Luckily, it’s sometimes as simple as writing a check.
For example, our custodian TD Ameritrade allows clients to establish check-writing privileges on their IRAs. If your IRA’s custodian offers this option, you can write a check to your preferred charity — just as you would with money from your bank account. If your custodian doesn’t allow check-writing privileges, it’ll issue its own check to the charity.
Whatever you do, don’t withdraw the money from your IRA, then write a check from your regular bank account. This won’t count as a QCD, and will make your withdrawal subject to taxes.
Once you’ve successfully made your donation, get a receipt from the charity, as you’ll have to report the contribution on IRS Form 1099-R.
Contributing to charities is a wonderful way to improve the world — and, if done strategically with a QCD from your IRA, it can also be a smart way to reduce your taxes.
If you’d like to discuss this, or any other financial topic, get in touch and we’ll be happy to help.