Reduce Your Tax Burden with a Qualified Charitable Distribution (QCD)

Lee McGowan, CFA, CFP® |

Due to recent income tax changes, it may be an opportune time to make a qualified charitable distribution (QCD) from your IRA.

The new tax law has increased the standard deduction and as a result, some taxpayers will not benefit from itemized deductions and hence will not receive a tax benefit from their charitable donations.

What is a QCD?

A qualified charitable distribution is a donation directly from an IRA to a qualified charity (up to $100,000) and is available for individuals over 70 ½ years of age. If you are 70 ½ or older, you are required to take a required minimum distribution (RMD) from your IRA on an annual basis. The QCD will reduce the RMD dollar for dollar up to $100,000.

What are the benefits of making a QCD?

A qualified charitable distribution allows you to make a gift to charity and also reduce your income tax burden whether you itemize deductions or not.

If you donate cash directly from your IRA to a charity, you are not required to report the distribution amount as income on your tax return. Several benefits are realized with a QCD strategy:

  1. Your income is reduced by the amount of the QCD, hence the QCD acts as a deduction for federal income tax purposes.
  2. As a result of less income reported on your tax returns, you might be eligible for lower Medicare premiums and additional medical expense deductions.
  3. Massachusetts taxpayers are not eligible for a state income tax deduction for charitable donations. However, by not reporting the additional income, they benefit by saving the state income tax rate of 5.1% on the amount donated to charity via a QCD.

Please consult with your tax and financial advisors regarding your charitable donations and tax planning.