Recent changes to the federal income tax laws make it less likely that taxpayers will itemize deductions, like charitable donations. This is, in large part, because fewer taxpayers benefit by itemizing their deductions with the increased standard deduction amount (now generally $24,000 for a married couple filing jointly). According to one study, only 13.7% of taxpayers will itemize deductions on their 2019 federal tax return – down from 31.1% who itemized deductions before the changes took effect.1 At certain income levels, the estimated gap increases to four times fewer people itemizing under the current law. One of the goals of tax reform was to simplify tax filing for the average American. Claiming the standard deduction instead of itemizing does simplify the tax return process. Unfortunately, one unintended result of these changes has been a reduction in charitable donations by individuals. Statistics on the exact amount vary, but it’s clear that taxpayers have less financial incentive to donate when there is no tax deduction available for the donation.
For taxpayers who own an IRA, however, there is still a way to donate to a charity and reduce their tax liability. If you own an IRA (or an inherited IRA) and are age 70½ or older, you can make a tax-free Qualified Charitable Distribution (QCD) of up to $100,000 each year. Because QCDs must come from pre-tax savings, the money you donate will be entirely tax-free (you did not pay tax on the money going into the IRA and you will not pay tax on the money you donate). As another incentive to donate from your IRA, you may satisfy your required minimum distribution (RMD) with a QCD. This can help decrease your taxable income for the year because you don’t have to include in income the amount of RMD you choose to donate. Another benefit for some taxpayers who have a large amount of basis (nondeductible contributions) in their traditional IRAs is that because QCDs must come from pre-tax savings only, making a QCD can help deplete an IRA of assets that you would otherwise be taxed on when distributed from the IRA. This increases the proportionate amount of basis left in the IRA so future distributions will include more nontaxable dollars.
To make a tax-free QCD, you must meet certain requirements.
Confirm the organization is qualified. Qualified charitable organizations eligible to receive a QCD generally include churches, 501(c)(3) organizations, nonprofit colleges, museums, hospitals, research organizations, Veterans’ organizations, fraternal societies and associations, and governmental or political subdivisions like a city police department. You can use the IRS’s Tax Exempt Organization Search to find qualifying charitable organizations.
Request information from the charitable organization. Contact the organization to obtain instructions for transferring the funds and completing a QCD transaction.
Request a direct transfer. Instruct your IRA custodian to directly transfer your donation from the IRA to the charitable organization. This is an important step. You cannot make a QCD from an IRA distribution you have already received.
Confirm timing requirements. The donation must be made by December 31 of the tax year. Confirm with your IRA custodian that the distribution can be processed by December 31.
Choose the dollar amount. You may exclude up to $100,000 from taxation each year as a QCD. Your spouse, if you file a joint tax return, can also exclude up to $100,000 as a QCD.
Make sure your IRA assets qualify. A QCD must be made from assets that would otherwise be taxable when withdrawn from the IRA. And you cannot make a QCD from an ongoing SEP or SIMPLE IRA that continues to receive contributions under an employer’s SEP or SIMPLE IRA plan.
Keep documentation. Document the transfer for your tax files. You should have the same type of acknowledgment of your contribution from the charitable organization that you would need to claim a tax deduction for a charitable contribution.
To Learn More
To learn more about how you can make a QCD for 2019, contact Mainstar Trust and the charitable organization of your choice to obtain all the necessary information to complete the donation.
Visit Mainstar Trust at mainstartrust.com.
Contact the Mainstar Trust team at 1-800-521-9897 or customerservice@mainstartrust.com.
1 Tax Foundation, “How Many Taxpayers Itemize Under Current Law? September 12, 2019