As the end of the year approaches, we all tend to get more generous. Everything about the Christmas season keeps the thought of giving on our minds. (According to Nonprofitsource.com, December is when 30% of all donations are made, and 10% happens in the last 3 days of the year!)
You may be thinking about making some qualified charitable contributions, and we think it’s a great idea! Not only will you be supporting some of your favorite charities that depend on donations like yours, but you can also significantly ease your tax burden when you file in a few months.
So in this post, we’ll help you with your year-end gifting strategies so you can give without confusion, specifically when it comes to qualified charitable contributions from an IRA.
Charitable Contributions
For starters, let’s look at the ways you can make charitable contributions. These 5 are the most common:
1. Cash
Cash is king when it comes to giving. It is readily available, simple to transfer, and spends easily.
Giving actual cash or making a monetary donation by personal check or bank card is probably the method most preferred by charities. When nonprofit organizations have cash on hand, they are able to purchase the things they need and respond to financial situations without a lot of hassle.
If you do make a cash donation, be sure to get a receipt or hang on to a copy of the transaction from your bank in order to be able to use it as a tax deduction later.
2. Stocks/Securities
Many nonprofits will accept stocks and securities as charitable contributions as well. Giving in this way simply involves the transfer of ownership of the stocks you want to give.
This is a good way to make a much larger donation than cash and avoid capital gains tax too. If the stock has risen in value, it’s best to donate it directly as we mentioned above. However, if the stock’s value has dropped, you should sell it first and just donate the cash proceeds so that you, the owner, take the loss.
If you’re planning to do this, it’s best to contact the nonprofit and your tax advisor to make sure everything is handled smoothly.
3. Assets
An unused car, boat, or other vehicles can be a valuable donation to a charity. They can sell it and convert it to cash or use it to help with their operations. Other personal assets like jewelry, artwork, and real estate can be given as well.
4. Charitable Trusts
Many people like to continue giving after they’re no longer living. Donating part of an estate through a will or a life insurance policy is the most common. Charitable trusts are a good way to make sure your favorite charity is supported even after you are gone, and your estate planner or financial advisor can set things up for you.
Here and now, though, you can also take advantage of giving in this way through a couple of types of trusts:
a. Charitable Lead Trust – the charity of your choice receives a certain amount of money annually for a specified period of time, after which the rest of the money goes to another beneficiary.
b. Charitable Remainder Trust – the charity receives what is left after other named beneficiaries have received their yearly money for a certain amount of time.
5. Charitable Contributions from an IRA
One more way you can give is by a qualified charitable distribution (QCD) from an IRA. If you are of a certain age and keep your donation below a certain threshold, you can avoid having to pay any taxes on it.
We’ll spend the rest of this post unpacking this way of making a donation to your favorite charity.
What Is A Qualified Charitable Contribution?
A qualified charitable contribution (also known as a qualified charitable donation, or QCD) is a way that you can give to a nonprofit organization through your individual retirement account (IRA) while you are still living.
It’s an ideal way for people who have moved into the retirement phase of their life to continue being generous.
QCD Rules
Not everyone can simply transfer money from their IRA to a charity without tax implications. The IRS sets up certain QCD rules that regulate how such distributions are done:
- You must be 70 ½ years old or older.
If you are 72 or older, you are already required to withdraw an RMD (Required Minimum Distribution). The IRS has Required Minimum Distribution Worksheets that help you know how much you need to take out each year.
A QCD can be applied toward your RMD to help you reach that amount. - QCDs are limited to the amount that would otherwise be taxed as ordinary income.
- The maximum amount that qualifies for a QCD is $100,000 per individual. If you and your spouse file jointly, they can also contribute up to $100,000 as a QCD.
- Funds must be distributed directly from your IRA, Roth IRA, or non-ongoing SEPs & SIMPLE IRAs to a qualified charity. If funds are distributed to you before being passed along to the charity, they do not count as a QCD and are subject to taxation.
- The charity being donated to must be a 501(c)(3) organization. Private foundations and donor-advised funds do not qualify.
For further reading on the topic, Fidelity has an article on donating to a charity using a qualified charitable distribution (QCD) that includes some good hypothetical scenarios.
Avoiding Taxes on IRA Withdrawals
Make sure you tell your tax preparer when you do a QCD, since a QCD is reported on Form 1099-R as a normal distribution for non-inherited IRAs and similar retirement accounts. As we’ve already mentioned, the donation must be made as a direct transfer (or rollover).
Additionally, when you make a QCD up to the IRS limit of $100,000, you lower your Adjusted Gross Income (AGI) for that tax year. This can further lower your tax burden. Talk with your tax advisor to get all of the details on the tax implications for your particular situation.
Also, for even more savings, be sure to check out “3 Small Business Donations You Might Not Know Are Tax Deductible.”
Call Us For Help With Qualified Charitable Distributions
For over 4 decades, we’ve been helping small business owners all across West Tennessee (Jackson, Dyersburg, Paris, Brownsville, Martin, & Milan) will all kinds of tax-related situations.
We believe you deserve to be able to give without being taken.So if you’re thinking about doing some charitable contributions from an IRA this year, schedule a call with one of our tax pros today!
