If you are someone who makes charitable contributions and is also required to take Required Minimum Distributions (RMD) from your tax-sheltered savings accounts, there is a new, tax efficient way to make these contributions called Qualified Charitable Distribution (QCD).
This QCD provision was new for 2021. It is limited to $100,000 per person ($200,000 for a couple) but each party in the marriage is limited to $100,000. The contribution must be made directly to the charity from your tax-sheltered vendor. The vendor can either mail the check directly to the charity or send you the check to you (made out to the charity) which you can take to the charity.
The charity must be one that is approved by the IRS. You can't simply turn the money over to a friend or neighbor. Eligible charities include 501(c)(3) organizations and houses of worship. Donor-advised funds and so-called supporting organizations are not permitted to receive QCDs on a tax-advantaged basis.
The advantage is that nothing appears on your tax return – no income is recorded for the RMD and no itemized deduction is allowed, and your RMD is satisfied. Unless your other itemized deductions exceed the standard deduction, you don’t get the full benefit of the charitable deduction.
As an example let’s assume that your other itemized deductions equal $18,000 and you are required to take a $10,000 RMD which you take, and make a $10,000 charitable contribution with it. Assume you are married, both over 65 and your other taxable income is $100,000. In this case your standard deduction for 2021 would be $27,800.
No QCD Make QCD
Other income 100,000 100,000
RMD 10,000 -
Gross taxable income 110,000 100,000
Deduct Larger of itemized
Deduction/standard deduction 28,000 (ID) 27,800 (SD)
Taxable income 82,000 72,200 Tax liability $ 8,923 $7,567