What’s a Qualified Charitable Distribution?
Qualified Charitable Distribution, or QCD, is a distribution from your IRA account directly to a qualifying charity. IRA owners 70½ years of age and older are eligible.
Why Should I Care About a QCD?
For those who are charitably inclined, QCD distributions are not included as income and offer a way to reduce your taxable IRA balance—money that would otherwise be taxable income from future withdrawals. These distributions can satisfy all or a part of your required minimum distribution (RMD), but they are capped at $100,000 per year.
The CARES Act waives any RMDs for 2020. For many clients, their main reason, if not the only reason, for utilizing a QCD is to offset all or part of the taxable income from their RMDs.
This is not to say that you should not take a QCD this year. There is still the benefit of lowering what would be taxable income to you in the future, but it leaves the door open to consider other options.
Contributing to a charity from non-IRA assets has an advantage as well. As mentioned in one of our previous articles, the limit on charitable donations for individuals of 60% of modified adjusted gross income (MAGI) does not apply to cash contributions in 2020. Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of MAGI. This is a benefit for those that itemize deductions on their tax return.
If you do not itemize and instead claim a standard deduction ($12,400 for single and married filing separately or $24,800 for married filing jointly), your charitable deduction will be limited to $300.
So, What’s the Plan?
As mentioned before, you have options, and the proverbial “it depends” answer is applicable here. If you plan to contribute to charity every year and your contributions remain fairly consistent annually, perhaps you continue to utilize a QCD in 2020 for a tax-free withdrawal from your IRA. If your donations vary from time to time, perhaps this is a year to hold off or do a smaller amount and then donate a larger QCD next year to further reduce your taxable income in 2021.
If you plan to give more to charity than the standard deduction limits noted above, it may be a better alternative to contribute some appreciated stock from a non-IRA. It may be hard to believe, but some investors still have very large gains in some legacy positions that could use a trim. By gifting appreciated stock, you will avoid the capital gains you would likely owe if you sold the shares outright.
This is just another planning opportunity that has been presented to us by the CARES Act. As we await more guidance on this new bill, we should be thinking about ways we might benefit from what is otherwise an absolutely dreadful predicament we find ourselves in today.
If you have questions specific to your situation, contact the Experts at Henssler Financial:
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