Is a QCD or Mega QCD part of your holiday gifting plan?

Kolleen Schocke |

As we enter the season of giving and gratitude, people begin to shift focus to charities, helping their neighbors, and local communities. For charitably inclined seniors with IRAs, Qualified Charitable Distributions (QCD) allow for an extra benefit to giving – a tax benefit.

A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. The distribution must be made from an IRA, the owner or beneficiary must be over 70.5 years of age and is subject to a limit of $100,000 per year. If you’re over the age of 72 (the age where you must begin making deductions from your retirement accounts), this donation can count towards your annual Required Minimum Distribution (RMD).

Giving from an IRA account can be a good idea because the funds placed into these accounts are “pre-tax” meaning that they are subject to federal tax upon their withdrawal. However, through a QCD the amount given to charity effectively avoids capital gains tax and the person who donates the sum can reduce the amount from their annual income. Additionally, giving in the form of a QCD does not require the taxpayer to itemize when filing taxes at the end of the year. The giver can still take advantage of a potentially higher standard deduction but use a QCD for charitable giving and exclude the amount donated from their taxable income.

Reducing overall taxable income for the year may reduce the impact to certain credits like Social Security and Medicare so if you’re over the age of 70.5 it may be a beneficial strategy.

Charitable Gifting in 2021

A special provision has been made as part of the CARES Act for 2021, where a taxpayer can give up to 100% of their Adjusted Gross Income (AGI) as a cash gift to a qualified charity and claim it as a deduction on their federal taxes. Usually, the limit for cash gifts to charities is 60% but this has been temporarily lifted through the end of the year giving way to the term “mega QCD”. Although it’s not actually a QCD at all because the gift has its own contribution rules and requires a different tax process. However, it does allow for charitable contributions from retirement accounts.

Instead of requiring distributions from an IRA only, a so-called Mega QCD allows for charitable contributions from other types of retirement accounts such as a 401(K). Additionally, the giver does not have to be 70.5 but can be as young as 59.5 years old at the time of the donation. The donation must be given in cash instead of coming directly from the custodian of the retirement account and the amount must be itemized when filing federal taxes for the year 2021. A charitably inclined individual who meets these requirements can benefit from this temporary tax benefit by reducing the amount of taxable money in their retirement accounts and still contribute to a cause they believe in.

Be aware, this process does involve raising the taxpayer’s Adjusted Gross Income which could reduce or eliminate AGI based tax deductions, credits, and other benefits. In particular, this could impact medical expense deductions and Medicare IRMAA surcharges for Parts B and D, and taxation on Social Security benefits. [1]

This tax strategy may only be right for certain taxpayers. Since attempting to take advantage of this temporary 2021 charitable tax strategy can become complicated quickly, seek the advice of a qualified tax professional or reach out to our team with any questions.

 

 

 

 

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[1] https://www.investmentnews.com/times-running-out-for-a-mega-qualified-charitable-deduction-208387