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Legal Notes

Qualified charitable distributions

Seunghee Cha ProfileAttorney Seunghee ChaAre you over 70.5 years old? Are you charitably inclined? Do you have an individual retirement account (IRA)? If so, you can give up to $100,000 annually to charity directly from your IRA without the distribution being treated as part of your adjusted gross income (AGI) or taxable income. This type of charitable donation is called a Qualified Charitable Distribution (QCD).

Through the Consolidated Appropriations Act of 2016, Congress made the QCD permanent. Normally, distributions from your IRA are attributable to your AGI. If you make a charitable donation with funds after withdrawing them from your IRA, the donation reduces your taxable income (which is distinct from AGI) by the amount of the donation up to 50% of your AGI; however, your AGI is not reduced by the donation, because the IRA distribution is still added to your AGI. By contrast, if you give to charity directly from your IRA and meet the requirements for such donation to be treated as a QCD, the amount of the donation does not increase your AGI.

The exclusion of your charitable contributions from your AGI is significant, because the AGI affects your itemized deduction, credit, and exemption phase outs, Roth contribution eligibility, the net investment income Medicare surtax, Medicare premium costs, and taxability of Social Security retirement income. You can take advantage of QCDs even if you don’t itemize deductions: You can exclude your QCD from taxable income and take the standard deduction. Charitable giving is deductible if it is less than 50% of your AGI, and QCDs reduce your AGI even if the total amount would be otherwise greater than 50% of your AGI. Moreover, QCDs count toward the minimum required distributions from IRAs, which is attractive for those who continue to work and do not depend on IRA distributions or are in a higher income tax bracket.

Individuals over 70.5 years old who would benefit from QCDs:

  • You are charitable and do not itemize deductions.
  • Your IRA distributions push you into the 15% federal capital gains bracket. QCDs are excluded from taxable income, thus you continue to enjoy 0% federal capital gains tax.
  • Most of your assets are in an IRA(s).
  • You do not need your minimum required distributions.

President Trump’s proposed tax plan would reduce or eliminate certain taxes, deductions, and rates that affect the AGI and taxable income; however, minimum required distributions from IRAs and charitable deductions would not be affected under his plan. With the permanence of the QCD, for people over 70.5 years old who are charitably inclined, incorporating QCDs into your IRA withdrawal strategy can yield tax savings to leverage greater payout to charities.

The views expressed in this column represent general information. To address your particular and specific needs consult your own attorney. If you need help with referral to an attorney, contact the Franklin County Bar Association at (413) 773-9839 or the Worcester County Bar Association at (978) 752-1311. Elder law resources may be found through the National Academy of Elder Law Attorneys, Massachusetts Chapter, at massnaela.com or 617-566-5640.

Community Legal Aid (CLA) provides legal services free to people age 60 and older for civil legal matters with an emphasis on access to health care coverage (MassHealth and Medicare) and public benefits as well as tenants’ rights. A request for legal assistance can be made by phone at 413-774-3747 or toll-free 1-855-252-5342 during their intake hours (Monday, Tuesday, Thursday, and Friday from 9:30 a.m. to 12:15 p.m. and Wednesday from 1:30 p.m. to 4:15 p.m.) or any time online by visiting www.communitylegal.org.