Learn About Qualified Charitable Distributions in 2022

The owner of an IRA (Individual Retirement Account) who is also generous may be eligible for a tax benefit if they give money to a charity organization that meets the criteria for receiving the deduction. Tax Cuts and Jobs Act of 2017 introduced several significant changes to the tax law; one of the most notable was the increase in the standard deduction from $10,000 to $20,000 for individuals and $24,000 for married couples filing jointly.

The Joint Committee on Taxation has estimated that around ninety percent of filers will choose the standard deduction rather than claiming itemized deductions. Claiming a charitable contribution might not seem like a big deal if you don't choose to itemize your deductions on your taxes.

In that case, however, qualified charitable distributions (QCDs) may be a tax-wise alternative for you to give to charity because QCDs are not counted as income. It is because qualified charitable distributions are tax-free.

What Are Qualified Charitable Distributions?

Qualified Charitable distributions include tax-free contributions to qualified charities made by retirees. At age 7012, individuals are eligible to make tax-free QCDs from their IRAs up to a maximum of $100,000 annually (IRAs). QCDs, also known as IRA charitable rollovers, allow people to make charitable contributions in place of their required minimum distributions (RMDs). Since a donation to charity is considered a straight transfer, the funds are not subject to income taxation.

Your IRA custodian can mail a check directly to the charity on your behalf, or they can mail a check (payable to the charity) to you instead. A QCD can be advantageous for IRA holders above 7012 or those who have inherited an IRA because RMDs are typically taxable. A qualified charitable distribution (QCD) is a distribution that is made for the express purpose of lowering taxable income.

Rules For Qualified Charitable Distributions

You can't qualify for QCDs unless you can meet specific standards. For instance, if you are under 70 and a half, you cannot receive a distribution from a qualifying charitable organization. It is possible to make qualified charitable distributions (QCDs) of up to $100,000 to several different charities in a single tax year.

The eligibility requirement for qualified charitable distributions (QCDs) is increased by two for married couples filing their taxes jointly. It allows a couple with an IRA balance of up to $200,000 to potentially benefit from QCDs. The money must be given to a qualified charitable organization to receive tax-deductible donations and credit for a qualified charitable distribution. It cannot be of any use to you (the donor).

Private foundations, donor-advised funds, and organizations that support tax-exempt charities are examples of charitable organizations that are ineligible to receive QCDs. In addition, a donation to a qualifying charity must come straight from your retirement account to be considered valid.

That implies the IRA's custodian must write a check from your account payable to a charity eligible for contributions. If you take money out of your account and then try to give it to a charity organization, the transaction won't count as a qualified charitable distribution.

Qualified Charitable Distributions and Tax Bill

Qualified Charitable Distributions apply to all IRAs except Roth accounts. But the money you donate through a QCD is not counted as income for tax purposes. In other words, you can reduce the federal income tax you owe if you make a distribution that qualifies as a gift to charity.

You should consult a tax professional to learn how a QCD can influence your state income tax liability. Always keep your donation receipt after making a QCD if you need it for tax purposes. If you get a QCD from an IRA, you did not inherit, and the custodian will record it to the IRS as a normal distribution on Form 1099-R.

In contrast, a payout from an inherited IRA will be reported as a death distribution. QCDs can lessen your Social Security tax burden similarly to your regular income tax burden. They could also shield you from the additional 3.80 percent tax imposed by Medicare on investment earnings. Put another way, and the surtax is levied on those whose MAGI is above a specified threshold. If your taxable income appears lower than it is, the surtax may not apply to you.

Qualified Charitable Distributions Strategy

You should follow many guidelines to get the most out of this technique if you are employing a QCD to offset your RMD. It's a smart move to begin the year by directing disbursements from your IRA to the organizations to which you intend to give donations. It is an excellent strategy. In that case, you might have already finished making your annual charity donations before fulfilling your RMD obligation.

Because of this, you will be forced to take taxable distributions from your IRA, even though this may not be something you require or want to do. Since monies from any account other than an IRA are ineligible, a qualified charitable distribution is typically most effective when combined with a planned charitable donation.

Because the 1099R you get from the account custodian won't identify which distributions from your IRA qualify for qualified charitable distribution (QCD) status, you must communicate this information to a tax professional. Your tax specialist will also be able to assist you in comprehending the QCD tax treatment of your state, which may differ from the QCD tax treatment of the federal government.

Conclusion:

To minimize your taxable income, you can reduce your tax liability by donating a portion of your IRA to a charity that qualifies for a tax-free distribution. Since you won't earn a tax credit for a charity donation if you don't itemize your deductions, this strategy could be preferable to making a tax-deductible contribution.

Make sure to include your QCD in your tax filing. That can be done by including the amount donated in the total amount of IRA distributions. You can write "QCD" if all of your distributions were QCDs and the taxable amount is zero.