Q. Hi Dan. In your answer to Hank in your column about how to make charitable donations from an IRA, you said donating that was “… better than paying yourself the RMD and then cutting personal checks to the charities because some part of donations made by personal check is often not deductible or triggers other costs.” Since when are donations of personal checks not deductible? — Bryan in Suntree
A. Bryan, donations of all kinds have limitations of some sort. One in particular that would apply to writing a personal check affects most taxpayers these days.
Charitable donations from an IRA are called Qualified Charitable Distributions (QCD). To be eligible, the IRA owner needs to be 70 ½ or older, the charity must be a qualified 501c(3) charity, the check from the IRA must be made payable to the charity, and the total of all QCD made in 2024 cannot exceed $105,000 per taxpayer. QCD can only be made from IRA accounts. Those are the only limitations on QCD.
QCD can be very attractive to retirees in part because if the IRA owner is 73 or older and thus subject to Required Minimum Distributions (RMD) these QCD will count toward that minimum. QCDs are also completely exempt from taxation and do not count toward one’s gross income.
By contrast, if you distribute the money to yourself and then write personal checks, those distributions will also count toward your RMD, but the donation will not be fully deductible unless you have enough itemized deductions. Other taxes and costs can kick in because the distribution is added to your Adjusted Gross Income.
For example, say a couple, both over age 70½, has a total of $22,300 of itemized expenses on Schedule A for the year, none of which are charitable donations. Because this is less than their standard deduction of $32,300, they will use the standard deduction to calculate their taxes. If this couple donates to charity with personal checks, they can add those donations to their itemized expenses.
Until they have donated $10,000 to charity, their total itemized expenses will still not exceed the standard deduction, so they will use the same $32,300 standard deduction figure in their calculations even though they donated to charity. Hence, the first $10,000 of donations for the year will not be deductible to them.
If they distribute $15,000 from the IRA then wrote donation checks for $15,000, they would add $15,000 to their gross income and their itemized deductions would total $37,300. The result is $15,000 of increased income but an additional deduction of just $5,000 for that $15,000 in donations. Remember they get the $32,300 standard deduction whether they donate or not.
If they make the $15,000 donation as a QCD from an IRA, none of the $15,000 is taxable and none is included in income. That’s important because many things trigger off Adjusted Gross Income on a tax return. For example, $15,000 more in gross income means a $1,125 reduction in deductible medical expenses. It is also common to see additional gross income trigger additional taxes on investment earnings or higher Medicare premiums.
All this combines to make QCD a better way to give to charity for IRA owners over age 70½.
Dan Moisand, CFP®, has been featured as one of America’s top independent fee-only financial planners by at least 10 financial planning publications and practices at one of America’s most decorated independent firms. For more info, e-mail him dan@moisandfitzgerald.com, visit moisandfitzgerald.com or call Dan at 321-253-5400, Ext. 101.
Originally published on FloridaToday. Read the original article here.