Qualified Charitable Distribution (QCD) – a tax savings tip for income tax savings

Case study #1: “Jane”, a surviving spouse over the age of 70 ½, receives annual Required Minimum Distributions (RMDs) from the IRAs her husband left naming her as beneficiary.  While the RMDs are about the same amount as when “Dick” was alive, Jane suddenly finds herself with an unexpectedly large income tax liability because she now files Single rather than Married Filing Jointly.  Using Qualified Charitable Distributions (QCD) to fund her gifts to charity could save her money on her taxes.

Case study #2: Dick and Jane are a married couple over 70 ½ receiving annual Required Minimum Distributions from their IRAs.  They think they are paying too much in taxes.  If Dick and Jane give typically money to their church, or give to other charities, they can save money on taxes by utilizing Qualified Charitable Distributions – QCD – to make their gifts.  Senior couples with IRAs should know about QCDs for tax  savings.

What is a Qualified Charitable Distribution and how can it help a senior couple or a surviving spouse over 70 1/2? Instead of receiving the IRA required distributions from the IRA custodian, and then making gifts to church/charity, the taxpayer requests that the IRA custodian make all or part of the distribution DIRECTLY PAYABLE from the IRA custodian to the charity.  The effect is that the amount paid directly to the charity is not income to Dick or Jane, reducing the amount of IRA distributions that would otherwise be taxed as income.  The tax savings can be significant, especially for taxpayers in a higher tax bracket or for a surviving spouse.

While it is true that Dick and Jane will not receive a charitable deduction for the gift, it is more advantageous for the amount of the gift to be excluded from their income than it would be to receive the distribution and take a charitable deduction.

To find out more about Qualified Charitable Distributions or other tax saving or estate planning tips, consult with your financial advisor and estate planning attorney.

© Karen S. Hindson, Hindson & Melton LLC   March 25, 2016