Do you find yourself donating more to your favorite charities more during Covid since the needs are greater and your cash levels have increased as a result of less spending? Rather than donating cash to charity the old way by sending a check, consider utilizing a qualified charitable donation (QCD). That might sound complicated but it’s not. If you take an IRA required minimum distribution (RMD), you can transfer part of that to charity!
An estimated 90% of tax filers no longer itemize since the standard deduction amount was raised a few years ago. Therefore, they don’t get to deduct their charitable donations. Instead you might direct part of your required minimum distribution to charity using a QCD. A QCD gets paid directly to the charity instead of to you and can be counted toward satisfying your RMD for the year. A couple of other rules:
- You must be over 70 ½ although not counted against RMD until age 72.
- There is a 100K maximum amount that can qualify as a QCD.
- The QCD must be paid out of your IRA by 12/31 each year.
Sharing a recent analysis we did for a single client who itemizes and donates about 12K/year to charity; use of a QCD saved her about $1700/year in federal income taxes. And this number would have been even higher had she not been able to itemize! In addition, by removing the 12K of QCD from her required minimum distribution (ie lower income), her medicare part B premium dropped by $59/mo and part D by $12/mo for another $852 annually added to the $1700 by using the QCD and now suddenly there is a total of $2500 more in spendable income!
If you donate in large chunks of money mainly to a few non-profits be sure to discuss with your CPA or financial advisor how a QCD can work for you. And, don’t forget that the Cares Act also allows for a $300 ($600 for couples) above the line deduction for cash donations even if you don’t itemize.