Tax-Free Transfers to Charity

Are you taking advantage of Qualified Charitable Distributions ("QCDs")?

Many people withdraw money from their IRA to make charitable contributions. The IRA distribution becomes taxable income, and the charitable contribution reduces taxable income. It's a wash, so no big deal, right?

Wrong. This method results in no change to the taxable income, but the adjusted gross income ("AGI") goes up because of the distribution.

AGI is used in numerous calculations on your tax return. Just one simple example is the itemized deduction for medical expenses on Schedule A. As explained in our blog post, medical expenses are only deductible to the extent they exceed a percentage of your AGI. If you receive retirement income, your AGI goes up. Making a charitable contribution lowers your taxable income, but not your AGI. Since this method increases your AGI, less of your medical expenses are deductible.

QCDs allow IRA owners to make charitable contributions and meet Required Minimum Distribution rules without having the amount increase AGI or become taxable income. When a payment is made directly from the IRA to the organization it can be reported on the tax return as if the amount were not a taxable distribution. Since AGI is not increased, more medical expenses are deductible.

Since the QCD is not added to income, it should be noted that the contribution cannot be deducted from income. This is only fair, to prevent the double-dipping of contribution amounts.

For an amount to be a QCD, these rules must be followed.

• The account must be a standard, traditional IRA (not a SIMPLE or SEP IRA, 401k, etc.).
• The taxpayer must be 70 1/2 at the date of distribution.
• The distribution must be made payable directly to the charity.

QCDs meet RMD requirements, and no more than $100,000 may be treated as a QCD. For more information or to see if you can use this strategy to reduce both your AGI and your taxable income while satisfying your desire to make charitable contributions, call us at 435-275-8400 or visit thinknextstep.com.