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"Should You Do a QCD?" by Julie Jason

Originally published: June 23, 2023 (distributed by Andrews McMeel Syndication)

The subject of QCDs is on readers' minds. As a reminder, a qualified charitable distribution is a way to donate to charity that is available only to IRA owners who are age 70 1/2 (repeat, age 70 1/2) or older. When QCD rules are followed (see my blog at tinyurl.com/mw42ppcf), the withdrawal does not count as income at tax time. That's a huge benefit to the charitably inclined, especially if they are older and taking RMDs (required minimum distributions). 

     This is how I think of the decision-making process when considering doing a QCD: 

     1. Do you want to give to charity? 

     2. How much? 

     3. Are your living expenses covered even if you make the gift? 

     4. What assets could you use to make the gift? That is, what are the possibilities, such as cash, stock, etc., or perhaps an IRA?

     5. Do you normally take the standard deduction or itemize? 

     6. If you normally use the standard deduction, will the size of the gift be sufficient to consider itemizing?

     7. Do you have an IRA? 

     8. Are you over 70 1/2?

     9. Are you taking RMDs from your IRA?

     10. Do you have a 401(k) or 403(b) or other tax-deferred retirement plan?

     11. Do you have an accountant who does your taxes, or do you do them yourself? 

     With the answers to these questions, you can start to assess charitable gifting possibilities. 

     Let's consider "Mort's" situation. Age 75 and single, Mort wants to give $50,000 to his local hospital's foundation, and the amount is well within his budget. His potential sources are a bank account; appreciated stock; a tax-free Roth IRA; and a large 401(k). Notice that he does not have a traditional IRA. 

     Before making any decisions, Mort consults with his accountant to address tax savings. 

     Of Mort's choices, the 401(k) is the least tax-efficient way to make a gift to charity. The 401(k) will not qualify for a QCD nor for a tax deduction. 

     The Roth IRA would qualify for a QCD, but Mort would be wasting the Roth's outstanding tax advantages. 

     Mort's best option is making the gift with cash or securities and to itemize the deduction on Schedule A to Form 1040 (tinyurl.com/7k86jj5s). 

     Whether Mort can itemize the full $50,000 will depend on his other itemized deductions, such as medical expenses and real estate taxes, and a limit based on Mort's AGI (adjusted gross income). See IRS Publication 526 (tinyurl.com/yc3n92ny): "The amount you can deduct for charitable contributions is generally limited to no more than 60% of your AGI. Your deduction may be further limited to 50%, 30%, or 20% of your AGI, depending on the type of property you give and the type of organization you give it to."

     If Mort's income is $100,000 and he writes a $50,000 check to charity, he will get the benefit of a tax deduction if he itemizes. His federal tax bill will be about $6,600, calculated using TaxAct's income tax calculator (tinyurl.com/2b4hm9nu).

     Let's compare Mort's situation to "Joan's," who is age 80, and has an IRA. Her RMD is $50,000, which is one-half of her income of $100,000. She normally claims the standard deduction, meaning she does not itemize. The standard deduction for single filers is about $13,000. 

     Even though Joan does not itemize, she will receive a tax benefit by doing the QCD of $50,000. While the gift to charity is identical to Mort's, she will pay about $2,000 less in taxes. 

     In Joan's case, a QCD is optimal. Her $50,000 QCD happens to equal her RMD. Normally, her income would include the $50,000 RMD. But, due to the QCD, the IRA withdrawal gets a pass -- it doesn't count as income at tax time, but it still counts as an RMD for tax purposes. 

     As you can see, whether to write a check to charity or do a QCD will depend on your personal situation. Talk to your accountant to work through your best options. And, if you are in Mort's situation, consider rolling over your 401(k) to an IRA if you want the benefit of a QCD.