Qualified charitable distributions are a valuable tool in reducing taxes. The deadline for the 2019 year is December 31, 2019. Qualified charitable distributions are valuable if a person is taking required minimum distributions and also making charitable gifts.
Under the new tax act, most taxpayers are no longer able to itemize deductions, which includes charitable contributions, on the federal return due to the increase in the standard deduction. As such, many taxpayers are no longer able to deduct their charitable contributions on their federal income tax returns. A qualified charitable distribution allows an individual who is over the age of 70½ to make a direct distribution from their traditional IRA’s (including rollover and inherited IRA’s) and SEP and Simple IRA’s if such are inactive (not receiving ongoing employer contributions), and Roth IRA’s (only to extent taxable) to a charity. The benefit of doing such is that the amount transferred to the charity will be counted as part of your qualified minimum distribution and it will also not be included in your gross income for federal and state income taxes. The reduction in gross income may reduce the impact to social security income and other tax credits and deductions.
An individual is unable to make a qualified charitable distribution until they attain the age of 70½. A qualified charitable distribution can be utilized by an owner or a beneficiary. It is important that the qualified charitable distribution be done as a direct transfer from the retirement account to the charity. If a distribution is paid to the individual, and the individual proceeds to make a contribution to the charity, such will not qualify. However, if the retirement account issues a check made payable to a charity and mails it to the taxpayer, the taxpayer may deliver the check to the charity and such will qualify for a qualified charitable distribution.
The charity should cash the check by December 31. The taxpayer should start the process early to mid-December to make sure the check can be issued, delivered and cashed by December 31. If the check is to be sent directly from the IRA to the charity, a Medallion Guarantee may be required which may further delay the process.
It is also important that the donor does not receive any compensation or gifts in return for the donation. The charity must be a 501(c)(3) organization. Gifts to donor advised funds or private foundations do not qualify as a qualified charitable distribution. The current tax year limit is $100,000.00 per person and a married couple can each do a qualified charitable distribution of $100,000.00 per year from their own accounts. However, qualified charitable distributions are limited to the amount that would be taxed as ordinary income. Qualified charitable distributions are not available from any employer plans.
Finally, qualified charitable distributions will be applied to taxable amounts in your retirement accounts. As such, qualified charitable distributions are generally unavailable for Roth IRA’s. A qualified charitable distribution is not subject to withholding and a donor should make sure to receive an acknowledgment of the donation from the charity.
If you are over age 70½ and have an intent to make charitable gifts, I encourage you to meet with your financial and tax advisors to discuss utilizing qualified charitable distributions to reduce your taxes.