United States: A QCD Might Help You Meet Charitable Giving And Tax Savings Goals

Last Updated: August 21 2017
Article by Peggy Vyborny

In late 2015, Congress reinstated and made permanent a tax break that allows people age 70½ and older to transfer up to $100,000 per year tax-free from an IRA to a public charity and apply that amount to their required minimum distributions. This article discusses the advantages of making such qualified charitable distributions (QCDs) and when they might not be appropriate.

If you are age 70½ or older, have a significant balance in a traditional or Roth IRA and plan to make charitable gifts, consider a qualified charitable distribution (QCD). In December 2015, Congress reinstated and made permanent this tax break. A QCD, also known as a charitable IRA rollover, allows you to transfer up to $100,000 per year tax-free directly from your IRA to a public charity and to apply the transferred funds toward your required minimum distribution (RMD) for the year. However, while IRA rollovers can generate significant tax savings, there are other charitable giving tools that might suit your needs better.

Putting It to Use

A QCD provides tax advantages when a donation of other assets would be wholly or partially nondeductible. This may be the case if you do not itemize or if your total contributions could exceed deduction limits.

Generally, deductions are capped at 50% of your adjusted gross income (AGI) — 30% for donations of appreciated capital assets. Although unused deductions may be carried forward up to five years, these limits reduce the tax benefits of charitable deductions in the current year. In contrast, a QCD is excluded from your taxable income. Essentially, it is the equivalent of an "above-the-line" deduction, so you enjoy the equivalent of a full charitable deduction even if the donation otherwise exceeds AGI limits.

A QCD also may be preferable if your income is high enough to trigger the Pease limitation on itemized deductions. This limitation puts a floor on certain deductions when your AGI exceeds a certain threshold, currently $259,400 for individuals and $311,300 for joint filers. You might consider one if taking an IRA distribution would push you over the income threshold for additional taxes, such as income tax on Social Security benefits or the 3.8% Medicare tax on net investment income.

Taking a Pass

A QCD may not be appropriate if you are in a position to donate appreciated assets, for example, stock or other securities, because they may produce greater tax benefits than a QCD. Take the fictional Elaine, who plans to donate $20,000 to charity in 2016. She is in the 28% tax bracket and must take a $20,000 RMD from her IRA this year. If she uses a QCD to satisfy this requirement, she excludes the $20,000 from her income, saving $5,600 in taxes.

Suppose, instead, that Elaine donates $20,000 in stock that she originally purchased for $5,000. She will have to take the $20,000 RMD, triggering a $5,600 tax. But her charitable deduction for the stock should, assuming her total charitable deductions are less than 30% of her AGI, offset the tax. Plus, Elaine permanently saves the capital gains tax that would be due on the stock, resulting in additional tax savings of $2,250 (15% of the $15,000 gain). The bottom line in this particular example: A QCD could save her $5,600 in taxes, but a stock donation would save her $7,850.

You should definitely think twice before using a QCD to donate IRA funds that would otherwise be tax-free, such as nondeductible contributions to a traditional IRA or nontaxable amounts in a Roth IRA. In most cases, if you itemize, you will be better off taking a tax-free distribution and using the proceeds to make a tax-deductible charitable gift. Because the distribution is tax-free anyway, a QCD provides no income exclusion benefit and it does not qualify for a charitable deduction.

Keep in mind that not all transfers to charity qualify for QCD treatment. Most contributions to public charities, other than supporting organizations, are eligible, but distributions to private nonoperating foundations, donor-advised funds and charitable remainder trusts are not.

Executing Your Strategy

A QCD is invalid if the IRA custodian distributes the funds to you rather than directly to the charity, if you receive something of value from the charity in exchange for your contribution, or if you fail to obtain a proper written acknowledgment of your gift. So if you are considering a QCD, talk to your legal and financial advisors or call us. These advisors can help ensure that you execute a valid transaction in a way that is appropriate for your specific situation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Peggy Vyborny
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