Charitable Giving: Good for You and Your Tax Bill

It really is better to give than to receive — at least that’s what economic research tells us. In his 2014 study published by the Journal of Economic Psychology, Baris K. Yörük, associate professor of economics at the University at Albany-SUNY, found that giving to charity has positive effects on multiple areas of health.1 According to his findings, people who donate to charity are less likely to suffer from emotional or mental illnesses.

The study also points to several medical papers that link charitable giving to stronger immune systems and lower stress levels, increasing overall health and longevity in givers.

It’s possible that the U.S. government took note of Yörük’s study. At the end of 2015, Congress added a new, permanent benefit to the tax code for charitably minded retirees: qualified charitable distributions, also known as “QCDs.”

Charitable Giving Health Benefits

Normally, when a retiree pulls money from a traditional IRA, the distribution is taxed as income. The QCD rules allow you to direct money from your IRA to a qualified charity, while avoiding the income tax on that distribution. The money you pass to a charity through a QCD is not reflected as income on your tax return; from a tax perspective, it’s as if you never took the money out.

So what requirements do you have to meet to take advantage of this provision?

1. You must be at least 70 ½ years old

2. You must make the distribution from an individual IRA — distributions from a SEP IRA or a SIMPLE IRA don’t qualify for QCD treatment

3. You can take no more than $100,000 in QCDs per year, with the limit increasing to $200,000 for taxpayers who are married and file a joint return

4. Your distribution must go directly to a 501(c)(3) nonprofit organization — specifically, the distribution check must be made payable to the nonprofit in question

The mechanics of making a QCD are fairly straightforward: you simply instruct the company that holds your IRA assets to make a distribution to the qualified charity of your choice. Most companies that manage IRAs have a standard form for this process. If you are unsure of whether the charity “qualifies,” you can simply contact the organization and find out if it has 501(c)(3) status.

You can also use a QCD to donate your entire required minimum distribution (RMD) for the year, as long as the RMD is below the QCD limit. Alternatively, you can elect to contribute only part of your RMD, as long as two separate checks are issued for the distribution. Keep in mind that the amount of the QCD does not have to be connected to your RMD — you can contribute as much or as little as you want up to the QCD limit.

What is the Difference?

You might be wondering how these new QCDs differ from traditional charitable contributions, which can be deducted from your taxable income on your return. There are a couple of advantages to using a QCD over the traditional-deduction route.

The main advantage is that the full amount of the QCD is excluded from your income — that’s a 100-percent, dollar-for-dollar tax benefit. A traditional charitable contribution deduction is limited to no more than 50 percent of your taxable income. That means the lower your income, the lower your deduction for any charitable contribution.

The main advantage is that the full amount of the QCD is excluded from your income — that’s a 100-percent, dollar-for-dollar tax benefit.

Secondly, many of the deductions that are available through itemized returns — mortgage interest and unreimbursed employee expenses, for example — don’t apply to most retirees. In order to claim the traditional charitable contribution deduction, you must file an itemized return. The benefit of a QCD is that even if you don’t itemize your return, you can still reap tax savings on the distribution, because the QCD completely excludes the distribution from your income.

The QCD rules are designed to make it easier for individuals in retirement to contribute to nonprofit and charitable organizations. They also offer an added incentive for retirees to make monetary donations to charities that they support. If you are retired and plan to make a charitable donation this year, check to see if you qualify for QCD treatment — it’s an easy way to improve your tax bill and your health.

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Leah Schmid

CPA, CFP® | Financial Advisor

Leah Schmid, CPA, CFP® is an Financial Advisor with Wipfli Financial Advisors in Madison, WI. Leah primarily focuses on personal financial planning, tax planning and charitable giving strategies for families and individuals nearing retirement.

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Charitable Giving: Good for You and Your Tax Bill

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