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Qualified Charitable Distributions – What Are They and When Are They a Good Idea?

By: Dean Dorton | June 18, 2021

A qualified charitable distribution (QCD) is a direct transfer of funds from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying required minimum distributions (RMDs) for taxpayers over age 70 1/2.

Tax | Wealth & Estate Planning

By Matt Smith, CPA | msmith@deandorton.com and Elizabeth Leatherman, J.D., CPA | eleatherman@deandorton.com

Qualified Charitable Distributions

A qualified charitable distribution (QCD) is a direct transfer of funds from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying required minimum distributions (RMDs) for taxpayers over age 70 1/2.

A taxable IRA distribution increases the recipient’s adjusted gross income (AGI), which may increase income taxes and Medicare premiums. In the case of a QCD, the distribution is not included in AGI, and no charitable deduction is allowed. In many cases the substantial increase in the standard deduction levels in recent years has resulted in limited or no tax benefits from charitable contributions. Consequently, QCDs have become more useful as a tax savings tool.

Consider the following two examples in which a QCD is preferable to receiving an RMD and donating a like amount to charity.

Example 1

Facts Tax results Primary reasons for the tax savings from the QCD
  1. Single person, age 73
  2. RMD of $14,000
  3. Social security benefits of $30,000
  4. Other ordinary income of $30,000
  5. Charitable contributions of $14,000 and minimal other itemized deductions
  1. Federal and Kentucky income tax without QCD – $8,579
  2. Federal and Kentucky income tax with $14,000 QCD – $4,710
  3. Tax savings from QCD – $3,869 (45%)
  1. Minimal benefit from the charitable contribution deduction if no QCD
  2. More social security would have been taxable due to the increased AGI if no QCD

Example 2

Facts Tax results Primary reasons for the tax savings from the QCD
  1. Married couple filing jointly, each age 75
  2. RMD of $80,000
  3. Social security benefits of $50,000
  4. Capital gains and qualifying dividends of $100,000
  5. Other ordinary income of $150,000
  6. State and local tax deductions of $10,000
  7. Charitable contributions of $80,000
  1. Federal and Kentucky income tax without QCD – $62,478
  2. Federal and Kentucky income tax with $14,000 QCD – $55,710
  3. Tax savings from QCD – $7,361 (12%)
  1. Reduced benefit from the charitable contribution deduction if no QCD
  2. More investment income subject to the 3.8% net investment income tax due to the increased AGI if no QCD

In limited situations, using a QCD may cost additional taxes. Consider the following example:

Example 3

Facts Tax results Primary reasons for the tax increase if a QCD is made
  1. Married couple filing jointly, each age 75
  2. Kentucky tax-free bond interest of $35,000
  3. Capital gains and qualified dividends of $25,000
  4. Wife receives a 401(k) plan distribution of $100,000
  5. Husband has a $50,000 RMD from his IRA
  6. Itemized deductions, other than charitable contributions, of $18,000 of home mortgage interest and $10,000 of state and local taxes
  7. Charitable contributions of $50,000
  1. Federal and Kentucky income tax without QCD – $32,667
  2. Federal and Kentucky income tax with QCD – $33,805
  3. Tax cost from QCD – $1,138 (3%)
  1. Kentucky provides an exclusion from AGI of up to $31,110 of retirement plan income. Had the QCD not been made, the couple would have had a $50,000 charitable contribution deduction and would have been taxed by Kentucky on only $18,890 ($50,000 less $31,110) of the RMD

Note that our examples may suggest that all of an IRA owner’s RMD may need to be distributed to charity to take advantage of the potential benefits of QCDs. That is not a requirement. An IRA owner may distribute only a portion of the RMD to charity as a QCD, taking the balance as a taxable distribution.

Several requirements must be followed to properly make a QCD. Please consult your tax advisor to help you determine if this could be a good tax planning tool in your situation.

This article was originally published in News & Views (Dean Dorton’s quarterly newsletter).

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