Taking Advantage of the IRA Qualified Charitable Distribution

ira qualified charitable distribution deduction

Congress just made the Qualified Charitable Distribution permanent and has given you a powerful deduction tool for your IRA

After years of dragging its feet on critical tax deductions and credits, Washington has gotten it right with the Protecting Americans from Tax Hikes Act of 2015. The Act was signed into law mid-December to extend a long list of tax deductions and credits, most of which have been expiring and extending for so long that their known as “extenders.”

The Act extends some of the deductions and credits for another year while others were given three years and 20 deductions were made permanent. Among the permanent extensions was the qualified charitable distribution (QCD), a deduction that could be one of your best IRA tools to reducing your income taxes.

Saving Money on Taxes after Saving Money on Taxes

While contributions to your IRA are taken off your income when made and grow tax-deferred until withdrawal, you could be facing a hefty tax bill in retirement. Your IRA withdrawals are added to your income along with social security, dividends and other income. Work hard your entire life to secure financial security and that hard work could end up pushing you into a higher tax bracket in retirement.

Don’t think you can avoid the tax bite by not making withdrawals and letting your IRA investments pass through to your heirs. You are required to make Required Minimum Distributions (RMDs) once you reach 70 ½ years.

The Qualified Charitable Distribution can help you satisfy the RMD rule and help protect your income from taxes. The QCD is only available to people age 70 ½ or older but counts as your RMD and is deducted from your gross income. Your qualified distribution can be for up to $100,000 per year.

A caveat though, the qualified charitable distribution must be a direct transfer from your IRA custodian to the charity or non-profit organization. You cannot receive the money or deposit into your bank account. The only exception to this is that the IRA custodian can make the check payable to the charity organization and mail it to you before you send it on through to the non-profit. This is done so you can make a copy of the check for record purposes but you must not cash the check into your account.

ira qualified charitable distribution deductionThere are a few other rules for getting the most out of the qualified charitable distribution.

  • The organization receiving the money must be a qualifying charity or non-profit able to grant a deduction under IRS rules.
  • The charity must provide you with a receipt for the QCD and indicate that no goods or services were exchanged for the donation. You’ll need this receipt if you get audited so don’t forget to ask or the IRS will disallow the deduction.
  • You can take the qualified charitable distribution for a traditional IRA but not for a self-employed (SEP) IRA or a SIMPLE IRA.

The QCD will be included on Form 1099R, retirement account distributions, along with the rest of your annual withdrawals. You or your accountant will need to remember to account for how much of your total distribution was for the QCD to reduce your income.

The Qualified Charitable Deduction was just one of the extenders given new life by the Protecting Americans from Tax Hikes Act. The bill made over 20 tax relief provisions permanent including a deduction of state and local sales taxes, deductions for teacher classroom expenses and two provisions for mutual funds.

Extending these deductions and credits to offset the constant increase in taxes is an important part of our economy and your chance to meet your financial goals. It’s obvious that taxes are only going to get worse as Washington digs itself into a deeper fiscal hole. Understand how to protect your retirement assets through a traditional IRA or a Roth IRA.

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