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Charitable Donations and Your Financial Plan

Charitable Donations and Your Financial Plan

September 12, 2021
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Hi everyone, and welcome back to Melissa Making Cents!

 

As a CERTIFIED FINANCIAL PLANNER™ and a financial coach, I enjoy working with clients to prioritize their financial principles into their personal financial plans. One thing that I've learned by meeting with so many personalities is that each person is different. Those differences bleed over into how people want and choose to spend and save their money and ultimately significantly impact one's financial plan. For those who are interested in giving and making donations a part of their life and financial plan, there is such a thing as the Qualified Charitable Contribution, or QCD. 

 

Qualified Charitable Contributions are familiar to many. However, they're less often put into practice. Today, we're here to change that by talking about what a Qualified Charitable Contribution is, how it can help you with taxes, and how timing is everything with Qualified Charitable Contributions. We're also going to be talking about two things that I'm very passionate about North Texas Giving Day and The Scholarship Fund.  

 

 

Charitable Giving in Your Financial Plan

 

Melissa Cox CFP explains Charitable Giving in your Financial Plan

 

Personal and Financial principles vary depending on your personal philosophy. Being able to align your principles into your financial plan is very empowering to some.  The idea that you are making your money work towards things that you deem valuable can be extremely rewarding.

 

One of those principles is charitable giving.  Whether it’s tithing to your religious organization or donating to a specific charity, charitable giving can help alter the lives of people living in our community. It’s high on my list of personal principles, which is a reason I’m so passionate about this topic.

 

There could be tax benefits to making deductions, and if you are planning a large donation I’d suggest consulting your tax advisor before making the contribution.

 

 North Texas Giving Day 

 

Melissa Cox CFP talks about North Texas Giving Day


You may be wondering what exactly is North Texas Giving DayI'll let Communities Foundation of Texas explain, "Communities Foundation of Texas' NTX Giving Day is an 18-hour online giving event designed to empower every person to give back to their community by supporting local nonprofits and causes they care about in one easy-to-use platform."

 

This event has been going on for over a decade and has raised a total of $375 million for nonprofits. The large community support has made this fundraising effort the largest community-wide giving event in the country. One of the best aspects of this event is that your donations to charities and nonprofits are matched by various other donors! That means that with your Charitable Contribution, you'll be able to multiply the impact of your donation to deserving organizations that could really use the money and help!

 

NTX Giving Day supports over 3,350 nonprofits in 20 North Texas counties, so there are a lot of charities to choose from!


 

The Scholarship Fund

Melissa Cox CFP introduces The Scholarship Fund

 

It just so happens that one of the great organizations that participates in North Texas Giving Day is very near and dear to my heart. As someone who sits on the board of directors of The Scholarship Fund, I cannot emphasize enough how much donations help our cause. In the last two decades, The Scholarship Fund has raised nearly half a million dollars to help those in the Dallas/Fort Worth area with financial need continue the or education after high school. If you decide to contribute to The Scholarship Fund during North Texas Giving Day, donations will be matched 1/1 up to $5,000. 

 

What is a Qualified Charitable Distribution

 

Melissa Cox CFP explains a Qualified Charitable Distribution


Okay, now let's get more into the nuts and bolts of what Qualified Charitable Contributions are, how they work, and how to implement them. Generally speaking, a qualified charitable contribution or a qualified charitable distribution is a contribution made to either a nonprofit or a charity from an IRA that is tax-deductible. All of that information may still be a little jumbled so let's break it down piece by piece. 

 

The first question that many will have about qualified charitable distributions and contributions is… what's the difference? It's sort of confusing that there are two names, but rest easy. There really isn't any difference between distributions and contributions; it's the same thing with two names. 

 

The next question many will have is what makes a distribution or contribution qualified? The answer to this comes in two parts. First, the distribution or contribution is qualified because of who receives it, but it is also qualified because it is tax-deductible. Second, to be qualified, the recipient of the distribution or contribution must be a "qualified" charity (we'll get into more about that later). Lastly, distribution or contribution refers to the fact that the money given to charity is contributed or distributed directly from your IRA custodian.

 

Who Can Accept a QCD?

Melissa Cox CFP explains who can accept a QCD

 

One of the restrictions that comes along with qualified charitable distributions is who they can go to. While you can, of course, donate money on your own terms to just about anyone or any organization that you'd like, with tax deductions come rules that must be followed for your contribution to qualify. 

 

The main stipulation about who your distribution may be made to is that the accepting organization must be a 501(c)3. Organizations that classify as 501(c) 3's are exempt from federal income tax obligations and are typically considered to be charitable in some way. While your qualified charitable distribution or contribution must go to a 501(c)3, not all charitable organizations will qualify. According to Fidelity, 

 

"Some charities do not qualify for QCDs:

 

 

** Unfortunately, donations from your IRA for North Texas Giving Day do not qualify as a QCD, because it is seen as money given to a Supporting Organization, like Communities Foundation of Texas, in the name of a charity.  However... I encourage you to still give! Your gift really can make a difference.


Being sure that your qualified charitable contribution qualifies is very important. While you should figure out whether an organization qualifies to accept your distribution just by asking the organization, you and the custodian of your IRA must do your due diligence. This is one of many reasons that having a great financial planner or financial professional can make a huge difference in your life. Not only can we find ways to help you with taxes, retirement, and savings, we can help watch your back and make sure you aren't making any missteps along the way. 

 

How Much Can You Contribute?

 

The next stipulation with qualified charitable distributions is just how much one can contribute using this method. For an individual with an IRA, you're limited to contributing $100,000. If you're married, both you and your partner are individually limited to $100,000. This means that neither of you may exceed $100,000, but both could contribute up to that amount individually. 

 

This raises questions for many about how they may divvy up their donations. Many people would like to donate more from one individual and less from another (for example, one spouse donates $150,000, and the other donate $50,000). Unfortunately, how qualified charitable distributions are currently structured makes this impossible, and each IRA-holding spouse is limited to contributing $100,000 or less. 

 

Reasons to Take A Qualified Charitable Distribution

Melissa Cox CFP explains why you would want to take a QCD

 

All of this talk about qualified charitable distributions and qualified charitable contributions may have you wondering why you would make one? Well, I'm glad you asked! There are several reasons you might want to make a qualified charitable distribution or contribution!

 

One reason you might take a qualified charitable distribution is just out of the kindness of your heart! Perhaps you feel like you've been given so much by your community or helped by a specific charity and would like to give back! That's a wonderful reason that you might choose to donate using a qualified distribution. 

 

Another reason you may take a qualified charitable distribution is to lower the amount of taxable income you have! That's right, you can give and benefit from giving at the same time! By reducing the amount of money in your IRA, you're effectively lowering the amount of money you'll have to pay for income tax. 

 

Another tax-specific reason to donate using a qualified charitable distribution is to contribute to your church and receive the tax deduction! Many people aren't aware that many churches operate as a 501(c)3, which means they're eligible to receive your qualified charitable contribution!

 

How Required Minimum Distributions Come into the Picture…

Melissa Cox CFP explains the connection between QCD and RMD

 

Many might be wondering what a required minimum distribution is and how it comes into the picture with qualified charitable distributions. For a longer and more detailed explanation of required minimum distributions, check out my blog post Required Minimum Distributions and Your Financial Plan.

 

As a quick refresher, a required minimum distribution comes into play with IRAs and other tax-deferred accounts once you reach the age of 72. Accounts that require minimum distributions are generally tax-deferred, which means that you didn't have to pay taxes when you allocated those funds initially. However, once you begin taking distributions from the account, taxes must be paid. This is essentially a way for the IRS to ensure you aren't putting away money indefinitely to not pay taxes.

 

Now, you may be wondering what exactly required minimum distributions have to do with qualifying charitable distributions. The answer is… quite a bit. According to The Balance, "QCDs count toward your required minimum distribution for the year. If you have to take RMDs but you don't really want or need the money, QCDs can be a good way to distribute the minimum required amount out of the IRA and thereby avoid the 50% excise tax penalty levied if you neglect to take your RMD. As an added benefit, you'll avoid paying income tax on the distributions, as is required if you take the funds for your personal use."

 

So, if you're already considering making a charitable donation and have an IRA that requires you to take a required minimum distribution - this is a GREAT opportunity. Imagine you're already planning on paying X amount to your church or a nonprofit. Now imagine that you also have an IRA with a required minimum distribution coming up. Combine the two, and you have a win-win situation for everyone involved. 

 

Who Can Make a Qualified Charitable Distribution?

Melissa cox CFP explains who is eligible to make a QCD

 

Another variable at play with qualified charitable distributions is who exactly can make them. Unsurprisingly, if you're familiar with how this stuff works, not everyone will be eligible to make qualified charitable distributions. According to the IRS, a qualified charitable distribution is "an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70.5 or over that is paid directly from the IRA to a qualified charity." So, there you have it… to make a qualified charitable distribution, you must be over the age of 70.5. 

 

Now, keep in mind that you don't have to take the required minimum distributions until the age of 72, and qualified charitable distributions cannot be counted towards next year's RMD. This means that between the age of 70.5 and 72, you will be able to make qualified charitable distributions but won't be able to count them towards a required minimum distribution. This is no biggie for those who simply wish to make a difference in a charity while not being taxed on their contribution (up to $100,000). However, if you'd like to have the full spectrum of benefits by satisfying a required minimum distribution, that's a no-go… at least until you're 72. 

 

How Does The Qualified Charitable Distribution Work?

Melissa Cox CFP explains the QCD process

 

While I've glossed over some of the steps and requirements for making qualified distributions, we haven't explicitly laid them out. Let's take a quick moment to do so. That way, you know exactly what you're in for. 


Notify your IRAs custodian

The first step of the process is obviously to let the custodian of your IRA know your plans. Let them know what charity you're donating to, how much you're donating, and make it well-known that you'd like this to be a qualified charitable distribution. Of course, for this to work, you must have everyone on the same page, and it won't hurt to have a second set of eyes on the charity you're donating to (to make sure they do, in fact, qualify as a QCD recipient).


Notify the recipient (if necessary)

 

Once you've notified your IRA custodian, the next step is to inform the recipient. While this isn't always totally necessary, it's a good idea to let them know a qualified charitable distribution is in the works.


A Direct Check is Sent From the IRA to the Recipient 

 

Once everyone is on the same page, it's time to make a contribution. Either you or the custodian of your IRA will need to make a direct payment from your IRA to the charity you're donating to. This step is crucial to be done correctly. If done the wrong way (like having the distribution made to you and then giving it to the charity), the contribution will not qualify. (The contribution will still likely be deductible but there is a difference in tax calculations… which is I suggest working with your tax advisor!)


Get a Receipt 

 

After the payment is made to the charitable distribution in the form of a direct payment, you need to get a receipt for your records. 


Report it With Taxes

 

Lastly, one of the most important steps is to correctly report your qualified charitable distribution on your taxes. This is a very important step if you're trying to lower your taxable income or satisfy a required minimum distribution requirement. The specifics of this step can be very individualized based on a few different scenarios. Because of this, I'd advise you to meet with a professional to discuss your specific situation. 

 

Timing Can Make a Huge Difference… Especially When Donations are Matched.

Melissa Cox CFP suggests timing a QCD can make a difference!

 

With much in finance and financial planning, timing can be everything. It can make or break your qualified charitable distribution's effectiveness, be the difference for a charity that's in need, or even be the determining factor whether or not your distribution qualifies for the calendar year.

 

Once again, using North Texas Giving Day as an example, during certain events, your donation to an organization may be matched a certain amount. Sometimes this is dollar for dollar, and other times it may be more or less. However, when trying to make the most out of your distribution, donating while someone else will be matching your contribution can lend a serious helping hand to those in need. 

 

As a Financial Advisor, Melissa Cox CFP, helps clients with QCDs


If you're interested in learning more about making qualified charitable distributions, North Texas Giving Day, or The Scholarship Fund, please, feel free to call or email to schedule an appointment with me. Together we can create a financial plan that helps you make a difference for yourself and those in your community!

 

Schedule a call with Melissa Cox CFP®


Until next time...this is Melissa Making Cents!

Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is also a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.



Read last week's blog post by Melissa Cox CFP®