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Charitable Giving through Qualified Charitable Distributions

“Great philanthropy is distinguished not by the sheer size of a gift or grant, but by what it accomplishes.” 1

Americans are a charitable bunch. In 2019 we gave $449.64 billion to charity2, and this number is likely to go up in 2020 even in the midst of a global pandemic. According to a Fidelity Charitable study, 54% of donors plan to maintain their giving levels this year, and 25% plan to increase their giving3.

 

The Tax Code and Jobs Act of 2017 made significant changes to the tax code, including doubling the standard deduction. Raising the standard deduction reduced the number of Americans who itemize deductions from 37 million to about 16 million4. By eliminating itemizing deductions, these taxpayers were no longer able to get a tax break for charitable contributions. However, most people don’t donate to charity primarily because of the tax benefits. There are many reasons we give: altruism for others, social connection, trust in an organization, egoism (looking kind to others and feeling good about yourself), and the tax benefits5.

 

A great way to continue to reduce your tax burden through charitable giving (regardless of how you take your deductions) is by making a Qualified Charitable Distribution from your IRA. A Qualified Charitable Distribution (QCD) is a direct transfer of funds from your IRA to a qualified charity. Whereas regular IRA distributions are treated as income, QCDs are excluded entirely from taxable income. Not only are QCDs excluded from income, but they are also allowed to count against Required Minimum Distributions (RMD). So, if you have to take an RMD but were planning on giving money to charity, do it directly from your IRA. You’ll lower your taxable income and effectively reduce the taxes you pay.

 

There are a few things to be aware of if you’re considering a QCD. To be eligible, you must be over 70 ½ and have an IRA. The total QCD amount per year is capped at $100,000 per person6; additionally, if you are itemizing deductions, you aren’t able to deduct amounts given via QCD.

One pitfall you’ll want to avoid: the CARES act (as discussed previously in Jonathan Millican’s blog post) repealed the age cap for making IRA contributions. If you are still contributing to an IRA after age 70 ½, you cannot use these amounts as QCDs.

 

QCDs aren’t for everyone, but in the right scenario, they can be a great way to give to charity and reduce your overall income. You should consult with a tax professional to ensure these strategies are right for your particular situation.

 

    1. Give Smart: Philanthropy that Gets Results (by Lance Liebman and Thomas J. Tierney)
    2. Giving USA 2020
    3. COVID-19 and philanthropy: How Donor behaviors are shifting amid pandemic Fidelity Charitable
    4. Will Tax Reform Affect Your Charitable Deduction? Urban-Brookings Tax Policy Center
    5. https://theconversation.com/5-reasons-why-people-give-their-money-away-plus-1-why-they-dont-87801
    6. Rules And Requirements for Doing A Qualified Distribution (QCD)  Michael Kitces

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