Tax Free Gift from Your IRA

by Edward R. Kozak, CPA | Selden Fox

You can reduce or eliminate the tax on income you are required to take from your Individual Retirement Account (IRA), but may not need, using Qualified Charitable Distributions (QCDs). 

Individuals that are required to make Required Minimum Distributions (RMDs) and want to make charitable donations should consider the benefits of making QCDs. 

A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying your RMDs for the year if certain rules are met.

In addition to the benefits of charitable giving, a QCD excludes the amount donated from taxable income, which is unlike regular withdrawals from an IRA. Lowering your taxable income may reduce the impact to certain tax credits and deductions, including Social Security and Medicare.

Many types of IRAs are eligible for QCDs. These include traditional, rollover and inherited. The requirements to make a QCD are as follows:

  • You must be at least 70 ½.
  • QCDs are limited to the amount that would otherwise be taxed as ordinary income, excluding non-deductible contributions.
  • The maximum annual amount that can qualify for a QCD is $100,000. This limit applies to the sum of QCDs made to one or more charities in the calendar year. However, if you file taxes jointly, your spouse can also make a QCD from his or her own IRA within the same tax year up to $100,000.
  • To count towards your current year RMD, the funds must be withdrawn from your IRA by your RMD deadline which is December 31.
  • The donated amount from your IRA must be paid directly to a qualified charity.

There is no federal withholding requirement for a QCD. State tax rules will vary in this regard.

Any amount donated that exceeds your RMD cannot be carried forward to satisfy a future year’s RMD.

Using a QCD may make your contribution deductible. Because of the increase in the standard deduction with the passage of the Tax Cuts and Jobs Act (TCJA) in late 2017, many people who used to itemize will no longer find it beneficial to itemize. In these cases, there is no deduction for charitable contributions. By electing to utilize a QCD, in lieu if a traditional method of a direct donation, the contribution becomes deductible without the need to itemize.

If you don’t need the entire amount of your RMDs the QCDs allow you to lower your taxable income and contribute to the worthwhile charities of your choice.

Edward R. Kozak, CPA

Edward Kozak headshotEd Kozak is one of Selden Fox’s first employees, joining the firm as a certified public accountant when it was first formed in 1978. Ed’s diverse expertise allows him to facilitate the growth of clients’ businesses and design creative solutions for both their accounting and larger business issues.