Qualified Charitable Distributions, Can They Save Me Money?

What are Qualified Charitable Distributions?

Qualified charitable distributions (QCDC) allow individuals over age 70 ½ to donate money directly from a taxable IRA without triggering a 10% early withdrawal penalty. This type of contribution is called a “qualified charitable distribution.” A QCDC does not trigger a 10% early withdrawal fee, unlike traditional IRA withdrawals. However, it is subject to income taxes and limits on contributions.

The maximum amount you can contribute each calendar year is limited to $100,000 ($200,000 if married and filing jointly). You must donate within 60 days of turning 70 ½ years old. In addition, you cannot use the funds for personal expenses such as home improvements or college tuition.

Eligibility and Qualified Charitable Distributions

Qualified charitable distributions are particular gifts that allow taxpayers to deduct their gift’s total value without worrying about how much money they spent on it or whether the charity gets taxed on the amount received. They’re often used to help families offset the costs of home improvements, college tuition, and medical expenses.

In prior years, the rules governing QCDs required re-authorization from Congress each fiscal year, and those decisions could be made late in the calendar. As a result, many people waited until the end of the year to ensure they qualified for a QCD.

With the passing of the Protecting America’s Affordable Health Care Act (ACA) or “Obamacare,” the QCD provision is no longer subject to annual re-authorization. Instead, the provision became law as part of the ACA and is now permanently part of the Internal Revenue Service code.

You can plan your charitable contributions and begin reviewing your tax situations early each year. You’ll want to know if you qualify for a QCD before making significant charitable contributions.

If you qualify for a QCD, you’ll receive a 1099 form from the charity indicating your donation amount. If you don’t qualify, you’ll receive a W-2G form from the charity showing what portion of the donation went toward qualifying items.

Tax Benefits of the CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides immediate tax breaks for individuals and families impacted by COVID-19. This includes those affected by job loss due to the outbreak, self-employed people whose income drops because of the shutdown, and those who lose wages while working from home. In addition, the law extends unemployment insurance coverage to gig economy workers and expands access to free food assistance programs like SNAP.

Minimum Distributions Suspended

The IRS announced that it is suspending the requirement for people age 70½ to take mandatory withdrawals from their traditional IRAs and Roth IRAs. The move came just days before the deadline for taking those early withdrawals.

This probable relief for many who would’ve had to withdraw money from their retirement account. If you’re one of those folks, don’t worry — you’ll still be able to make gifts from your IRA. But if you’re younger than 70½, you might want to consider making a gift to a Colorado Foundation instead.

New Tax Incentives

The new tax incentives are included in the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act. This bill relieves individuals, families, businesses, and nonprofits during the COVID-19 pandemic.

The $1,200 check you receive will cover basic expenses like food, rent, utilities, and medical bills for most people. However, there are some exceptions. If you qualify for Medicaid or Medicare coverage, you won’t receive a total of $1,200. And if you’re self-employed or work for yourself, you’ll still pay taxes on the money.

But don’t worry about it too much because you can deduct your donations to qualified organizations. So if you donate $500 to charity, you could write off $250.

If you’re eligible for the standard deduction, you can contribute up to $300. If you’re itemizing, you can give away up to $600.

Key Takeaways

Charitable contributions from an individual retirement account (IRA) are qualified charitable distributions. These distributions are treated differently than regular income earned from stocks and bonds. For example, you can deduct up to 50% of your adjusted gross income (AGI) on your federal taxes. However, there are some limitations to contributing to an IRA. Here are three key takeaways about charitable giving from IRAs:

1. You can donate from an IRA without paying taxes. Contributions from an IRA are deductible from your federal taxes. This means that you don’t pay taxes on the money donated. If you donate $5,000 from an IRA to charity, you’ll receive a deduction of $2,500 ($5,000 x.50).

2. Your IRA trustees must report the distribution to the IRS on your tax form. Any contributions to an IRA must be reported on Schedule D of Form 1040, which reports all types of investments held within the IRA. Distributions made from an IRA are reported on Form 1099-R.

3. There are restrictions on how much money can be withdrawn from an IRA each year. For instance, withdrawals are limited based on age. Also, the amount withdrawn cannot exceed what is needed to cover certain expenses like medical costs or college tuition.

Please remember this article is not intended to be tax or legal advice, and you should always consult directly with your tax attorney or tax advisors. You can contact The McGuire Law Firm to speak directly with a tax attorney regarding any of your tax issues.