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Saving Taxes on Your IRA Distributions

I sometimes run into clients who have to take large distributions from their traditional IRAs and it bumps them into higher tax brackets even though they don't really need the money to live on. Here is one solution to avoid some of that taxation and do some good for the world.

IRA owners age 70½ or older have an option to transfer up to $100,000 to a qualified charitable organization (QCD) each year. For taxpayers born after June 30, 1949, the SECURE Act raised the required beginning date (RBD) for required minimum distributions to age 72. However, eligibility to make a qualified charitable distribution (QCD) remains at age 70½, regardless of the taxpayer’s required beginning date.

A QCD is a tax-free transfer that lower’s the taxpayer’s AGI which, in turn, may provide other tax advantages. Although QCDs are not itemized charitable deductions, the same substantiation rules apply. Taxpayers report the gross distribution on line 4a of Form 1040 and any remaining taxable amount on line 4b with the literal “QCD.” 

As mentioned, the taxpayer must be at least age 70½ when the distribution is made. A taxpayer is considered to reach age 70½ on the date that is six calendar months after the taxpayer’s 70th birthday. For example, a taxpayer born on June 30, 1949, attained age 70½ on December 30, 2019, and a taxpayer born July 1, 1949, attained age 70½ on January 1, 2020.

The taxpayer must receive the same type of acknowledgement of the contribution that would normally be needed to claim a deduction for a charitable contribution. If the deductible amount of the contribution is reduced due to lack of substantiation or any other reason (e.g. quid pro quo contribution), the exclusion is not available for any part of the IRA distribution.

QCDs apply toward the taxpayer’s required minimum distribution (RMD). If the amount of the QCD is less than the taxpayer’s RMD, the difference between the RMD and the QCD must be distributed to avoid the 50% penalty for not taking the RMD.

Total QCDs for the year cannot exceed $100,000 per taxpayer. Married taxpayers who file a joint return may each have a QCD of up to $100,000. The amount of the QCD is limited to the portion of the distribution that would otherwise be included in income.