Qualified Charitable Distributions

Individual Retirement Accounts are a great savings vehicle simply because they allow you to grow your savings on a tax-deferred basis.  As you know, IRAs are not tax-free; the savings are taxed upon withdrawal.  Many savers hold off on withdrawing these funds until the IRS forces you to take distributions at age 70 and a half. 

Any time you take a distribution from your IRA, it is reported as income on you 1040 (line 15).  In most cases, the distribution will increase your adjusted gross income, which in turn may increase your taxable income and as a result your tax liability may increase. 

One strategy to mitigate the impact of an increase in tax liability due to required minimum distributions is called a Qualified Charitable Distribution (QCD).

Rules:

  • Savers must make the distribution from their Traditional IRA after the date in which they turn 70.5;
  • Charity must be a qualified public charity; the IRS has a list of these charities on their website.  If you would like to see if your charity of choice qualifies, click here;
  • The check from your IRA must be made payable to the charity, not you;
  • The donation must qualify as a 100% cash donation; so no Badger season tickets in exchange for your donation;
  • And no more than $100,000.00 per taxpayer can be donated in this way in 2013.

Who benefits:

Although the answer to this question will typically be; “It depends on each individual’s tax situation…”; generally speaking, non-itemizers & high income taxpayers that already make large cash donations.

For instance, assume the following:

  • Taxpayers; married filing jointly
  • Non-itemizers – they take the standard deduction of $12,200.00
  • Prior to their QCD their AGI is $89,000.00
  • They have a $10,000.00 mandatory distribution from their IRAs in 2013.

If they take their $10,000.00 mandatory distribution amount and execute a qualified charitable distribution, their AGI drops from $89,000.00 to $79,000.00.  Aside from the obvious decrease in adjusted gross income, if you have medical expenses, the threshold amount for deductibility drops from $8,900.00 to $7,900.00 (10% of AGI).

For high income earners; as of January 1, 2013, married taxpayers with income of at least $300,000.00 will face limits on the value of deductions and personal exemptions.  These limitations are based on AGI.  The use of Qualified Charitable Distributions may lower the taxpayers AGI to put them under this threshold and open up the possibility of qualifying for deductions they wouldn’t otherwise qualify for.

The most important part of tax strategies is being educated about them.  Talk to your tax professional to determine if Qualified Charitable Distributions are a good strategy for you.

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