Be Tax Wise With Your Charitable Contributions

Donations to charities can be deducted as an itemized deduction on your tax return. This means that to achieve any tax benefit from your charitable donations, you cannot use the standard deduction and instead must itemize your deductions. However, if the total of all your itemized deductions does not exceed the standard deduction amount for the year, then you are better off taking the standard deduction, but in doing so, you will get no tax benefit from your charitable contributions.

As a rule, most taxpayers wait until tax time to add up their potential deductions and then use the higher of the standard deduction or their itemized deductions. If you want to be more proactive, here is what you should know about Qualified Charitable Deductions.

Qualified Charitable Distribution – If you are age 70.5 or older, you can make charitable contributions by transferring funds from your IRA account to a charity, which are referred to as qualified charitable distributions (QCDs). The only hitch here is that the funds must be transferred directly from the IRA to the charity, meaning your IRA trustee will have to make the distribution to the charity. No minimum amount needs to be transferred, but the maximum of all such transfers for the year is $100,000 per year, per taxpayer. Also note that distributions to private foundations and donor-advised funds don’t qualify for the QCD.

Thus, this strategy allows you to make a charitable contribution without itemizing deductions; since these distributions are tax-free, you can’t also claim a deduction for them. Even better, QCDs also count toward your minimum required distribution for the year. Because QCDs are nontaxable, your AGI will be lower, and you can benefit from tax provisions that are pegged to AGI, such as the amount of Social Security income that’s taxable and the cost of Medicare Part B insurance premiums for higher-income taxpayers.

If you decide to make a QCD, check with your IRA custodian on the IRA’s rules for how to request the QCD, and be sure to give the IRA custodian ample time to complete the process if you are making a request at the end of the year. Always get a written acknowledgment from the charity for tax-reporting purposes.

All content and information provided is for general educational purposes only and should not be considered professional financial or accounting advisory. For tailored guidance related to your situation, consult with a qualified business advisor.