If you are considering a contribution to the United States Power Squadrons Endowment Fund, consider the additional benefits of making your donation as a “Qualified Charitable Distribution” (“QCD”) from your Individual Retirement Account.  A QCD might reduce your taxes in addition to helping ensure the organization’s future. An IRA owner who is at least 70 ½ years old is eligible to make QCD’s of up to $100,000 annually to 501(c)(3) charities directly from his or her IRA.  If the IRA owner is 73 or older, the amount of the QCD can reduce the amount of any required minimum distribution for that year. A QCD is accomplished by having funds transferred directly from the IRA account to the designated charity.

The amount of any QCD made during the year is excluded from the IRA owner’s gross income; and this should also reduce the taxpayer’s adjusted gross income (“AGI”) and taxable income.  Note that no charitable contribution deduction is allowed for a QCD —no double dipping. The donor is still entitled to itemize other charitable deductions or claim the full standard deduction. If you don’t plan to itemize deductions, making a QCD is the only way to get a tax benefit from your charitable donation.

Excluding the QCD from income may actually have several tax benefits. If a QCD is made from what would otherwise be taxable as part of the donor’s required minimum distribution, eliminating that amount from gross income may shift the donor’s maximum federal and/or state income tax rate to a lower bracket.  This reduction will also reduce the donor’s AGI, which may have the following favorable results:

1. The donor’s AGI may fall below the threshold for the application of the Medicare surtax on net investment income.
2. The lower AGI may spare the taxpayer from higher Medicare Part B and D premiums; and
3. For taxpayers in lower brackets, it may spare social security benefits from federal and/or state income taxation.

Several points to keep in mind:

1. Although the amount of the QCD is excluded from income, it is still necessary to substantiate the contribution with a written acknowledgement from the recipient charity.
2. If you plan to reduce your required minimum distributions with a QCD, please pay attention to the order of your distributions. The IRS will treat the first distributions from an IRA as taxable distributions; if your required minimum distributions have already been distributed before your QCD, you will still be required to report the amount of RMD’s received.
3. A QCD may only be made from deductible contributions to an IRA (and the earnings thereon). If you have made non-deductible (after tax) contributions to your IRA, please check with your accountant or tax advisor as to how to make a QCD.

This summary of possible tax considerations is for informational purposes only.  It is not intended to provide and should not be relied on for tax, legal or accounting advice.  You should consult your own tax, legal and accounting advisors before engaging in any transaction.