At CCM, we believe an integrated financial plan is key to best supporting our clients in fulfilling their financial goals. In our experience, families benefit most from integration that incorporates investment, estate, tax, retirement, risk management, and philanthropic plans. Since qualified charitable distributions (QCDs) and donor advised funds (DAFs) are tax-efficient charitable giving strategies, their impact is significant across three of the disciplines CCM emphasizes and, thus, the subject of many financial planning discussions.
As you consider your philanthropic wishes, and how they integrate with your overall financial goals, it’s helpful to have a general understanding of the tax-related ramifications of two of the most widely used charitable giving strategies—QCDs and DAFs.
Qualified Charitable Distributions
A qualified charitable distribution (QCD) is a cash distribution made directly from an individual retirement account (IRA) to a qualifying charitable organization.
- You must have reached age 70 ½ to be eligible for a QCD.
- Each taxpayer is subject to a maximum QCD limit of $100,000 per tax year. A QCD is not limited to the RMD for that year.
- A QCD can only be completed from an IRA account (including traditional IRA, inherited, SEP, and SIMPLE IRA accounts). 401k and 403b accounts are not eligible for a QCD, but can be rolled over to an IRA account to become eligible.
- A QCD can be used to fulfill a required minimum distribution (RMD) from an IRA account.
- A QCD cannot be deposited to a donor advised fund or private foundation, as they are not considered to be qualifying charitable organizations for this purpose.
- A QCD is required to be reported on Form 1099-R as a taxable distribution by the IRA custodian. The taxpayer and tax preparer are responsible for excluding the distribution from income on the tax return by following required Internal Revenue Service (IRS) reporting procedures. A QCD is not reported as a charitable contribution on Schedule A (itemized deductions), because it is excluded from income.
Donor Advised Funds
- A donor advised fund (DAF) operates as a charitable investment account established for the sole purpose of supporting charitable organizations through the recommendation of grants from the DAF.
- Cash or securities (stocks, bonds, mutual funds, and exchange traded funds) can be contributed to a DAF account.
- Unrealized appreciation on securities held for more than one year which are contributed to a DAF, are permanently excluded from taxable income.
- Grants from a DAF cannot be used to fulfill a personal pledge to a charitable organization.
- Grants from a DAF are not reported as charitable contributions on Schedule A because the original contribution to the DAF was reported as a deduction in the year assets were contributed into the DAF.
- A DAF account is not subject to an annual required grant amount or percentage.
- A DAF account can name a successor to the account for purposes of making grants upon the passing of the original named grantor.
If learning more about QCDs and DAFs stirs questions or new conversations about your charitable giving goals, please contact your CCM advisor for a discussion.
NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.
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