QUALIFIED CHARITABLE DISTRIBUTION (QCD) FACTS
A Qualified Charitable Distribution (QCD) is a direct transfer of funds from your IRA (Individual Retirement Account) custodian, payable to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, as long as certain rules are met. If you are over 72 your IRA administrator should advise you that you are required to take minimum distributions from your IRA’s.
Using your RMD as a charitable contribution will exclude that amount from your adjusted-gross income (AGI) for the year, which means that in addition to reducing your income taxes, it also can decrease the amount of Social Security that is subject to tax and potentially lower your Medicare premiums. (You may be able to take a QCD from a Roth IRA, but there is no tax advantage.)
Why should I make a QCD from an IRA instead of donating normally?
Answer these questions first and you might get tax advantaged savings if yes:
- Am I 70 ½ (born before 7/1/1950)?
- Do I need or want to take money out of IRA’s (not 401ks)?
- Do I wish to make charitable donations to qualified charitable organizations?
Because the IRS requires withdrawals from IRA’s due to age, you may be able to withdraw funds and not be subject to ordinary income on your return by using a QCD. Here are specific QCD rules that should be considered.
- Most IRAs are eligible for QCDs—Traditional, Rollover, Inherited, SEP and SIMPLE
- You must be 70½ or older to be eligible to make a QCD.
- QCDs are limited to the amount that would otherwise be taxed as ordinary income. This excludes non-deductible contributions.
- The maximum annual amount that can qualify for a QCD is $100,000. This applies to the sum of QCDs made to one or more charities in a calendar year. (If, however, you file taxes jointly, your spouse can also make a QCD from his or her own IRA within the same tax year for up to $100,000.)
- For a QCD to count towards your current year’s RMD, the funds must come out of your IRA by your RMD deadline, generally December 31.
- Should St Theresa be considered for your QCD, please have your IRA administrator send payment to 455 N Benton St, Palatine IL 60067. Also, have the administrator identify the purpose you intend to support (such as weekly donation, Christmas, tuition assistance, etc. or split among several). The Parish Federal Employer ID (FEIN) is 36-2171140.
A word of caution – funds distributed directly to you, the IRA owner, which you then give to a charity do not qualify as a QCD. The distribution will be taxed as ordinary income first to you under this circumstance.
A QCD can only be made from IRAs. Money in employer-sponsored retirement plans such as 401(k)s and 403(b)s is not eligible for QCDs. A QCD may be made from a Roth IRA. Roth’s are not subject to RMDs during your lifetime, and distributions are generally tax-free. Consult a tax advisor to determine if making a QCD from a Roth is appropriate for your situation.
Donors cannot receive any benefit for making a qualified distribution to a charity. So, for example, you can’t use a QCD to purchase something at a charity auction or tickets to an event.
What kind of charities qualify?
The charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions.
A QCD is reported as a normal distribution on IRS Form 1099-R for any non-Inherited IRAs. For Inherited IRAs or Inherited Roth IRAs, the QCD will be reported as a death distribution. Itemization is not required to make a QCD. While the QCD amount is not taxed, you may not then claim the distribution as a charitable tax deduction.
Be sure to inform your tax preparer that you knowingly made a QCD. Your IRA custodian will send you a 1099 showing that the distribution occurred, but the amount may not be clearly identified as a QCD. Be sure the QCD is correctly listed on your tax return or you’ll lose the tax break. To report a qualified charitable distribution on your Form 1040 tax return, you generally report the full amount of the charitable distribution on the line for IRA distributions. On the line for the taxable amount, enter zero if the full amount was a qualified charitable distribution. Enter “QCD” next to this line.
A QCD is not subject to withholding. State tax rules may vary, so for guidance, consult a tax advisor.
When making a QCD, you must receive the same type of acknowledgement of the donation that you would need to claim a deduction for a charitable contribution. St. Theresa Parish provides that acknowledgement.
As with all tax related matters, you should consult your financial advisor and tax preparer when making this distribution.
ILLINOIS TAX CREDIT SCHOLARSHIPS
PERSONAL TAX BENEFIT — COMMON GOOD
What are tax credit scholarships?
The Illinois Tax Credit Scholarship Program, “Invest in Kids,” provides a 75% Illinois state income tax credit to individuals and corporations that contribute money to a non-profit Scholarship Granting Organization (SGO). The SGO will then award scholarships to eligible students from low-income families.
- An individual or corporation will receive a 75 percent credit on donations to an SGO. A tax credit is a dollar for dollar reduction of your tax bill. For example, if a person donates $1,000, they will receive a State of Illinois income tax credit of $750.
- Donors can designate their donations to St Theresa School.
- The credit can be carried forward for five years.
- However, this is not a federal credit and donors are prohibited from receiving a charitable tax deduction for these donations. Therefore, the Illinois credit still exists whether you are a taxpayer who itemizes on Schedule A of your Federal return OR NOT. Recent tax law changes resulted in many taxpayers no longer itemizing. *
The state program “Invest in Kids” offers a transformational opportunity for St Theresa School through these tax credit scholarships (TCS). Children from low-income families attending St Theresa may have access to scholarships that cover up to 100% of tuition and fees for these students. Scholarship eligibility is based on a family’s income and available funds earmarked by the State of Illinois.
INVEST IN KIDS IN THREE EASY STEPS
1. START THE TAX CREDIT APPLICATION PROCESS BY SETTING UP AN ACCOUNT AT www.mytax.illinois.gov
Applicants are required to have a MyTax Illinois account in order to “Reserve your Credit”. For first time donors, please “Request a Letter ID” from the Department of Revenue prior to December 15th, 2023. This ID is mailed and normally takes 7 to 10 business days to receive.
After the Letter ID is received, go back into myTaxIllinois.com to reserve your credit. For help in setting up the account you may also visit the Archdiocese website www.archchicago.org/tcs for step by step instructions for creating an account (click through the steps listed on the site).
2. DONATE TO A SCHOLARSHIP GRANTING ORGANIZATION (SGO) WITHIN 60 DAYS
Once the application is approved, donate to a Scholarship Granting Organization (SGO) within 60 days. The SGO with whom St Theresa is partnering is called Empower Illinois and their website is www.empowerIllinois.org . Again, assistance with the donation process can be found at www.archchicago.org/tcs (captioned “What is the process for donating”). Generally, it is suggested that you apply for the credit between December 1 through December 15, 2023 to insure the tax credit is secured.
3. DESIGNATE YOUR DONATION TO ST. THERESA SCHOOL (PALATINE)
During the donation process, donors will be given the option to donate directly to St Theresa – Palatine in any amount up to $100,000
Thank you for considering a donation to St Theresa School or any Archdiocesan School through the Illinois Tax Credit Scholarship. As stated throughout, more detailed information can be found at www.archchicago.org/tcs.
As with all tax related matters, you should consult your financial advisor and tax preparer when making this distribution.
* In general, only taxpayers who itemize on Federal Form 1040, Schedule A can deduct donations made to a charity.
DONOR ADVISED FUND
A donor-advised fund is like a charitable investment account, for the sole purpose of supporting charitable organizations you care about. Sponsoring organizations such as banks, investment companies and mutual funds have established public charities (e.g. Bank of America Charitable Gift Fund, Morgan Stanley GIFT, Fidelity Charitable). When you contribute cash, securities or other assets to a donor-advised fund at a public charity, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth and you can recommend grants to virtually any IRS-qualified public charity.
When you give, you want your charitable donations to be as effective as possible. Donor-advised funds are one of the easiest and most tax-advantageous ways to give to charity.
How a Donor-Advised Fund (DAF) works:
Make an irrevocable donation
Within your sponsoring organization’s public charity, donate cash, stocks or non-publicly traded assets such as private business interests, cryptocurrency and private company stock to be eligible for an immediate tax deduction. A contribution to a donor-advised fund is an irrevocable commitment to charity; the funds cannot be returned to the donor or any other individual or used for any purpose other than grantmaking to charities.
- Immediate tax deduction in current year; periodic and or discretionary donations in future years allows bundling of donations
As soon as you contribute to your Donor Advised Fund, you are eligible for a tax deduction for the current year, just as you would by donating to another charity. Then you could donate to charitable organizations in future year(s) on a scheduled or unscheduled basis. (Check with Sponsoring Broker if there is a mandatory timeframe to exhaust the initial funding of the DAF.)
- Grow your donation, tax-free
While you’re deciding which charities to support, your donation can potentially grow, making available even more money for charities. Most sponsoring organizations have a variety of options from which an investment strategy can be developed inside the DAF. However, as any investment, your donation can also decline in value depending on the investment options you choose.
- Support charities you love, now or over time
You can support St Theresa Church, the School, Archdiocese or other qualified charities with grant recommendations from the donor-advised fund over a period of time. Remember that the initial donation was deducted in the year that you contributed to the DAF, hence periodic charitable donations from the DAF over time will not be deductible. For church and school grants, the Federal tax id number is 36-2171140.
The Sponsoring Organization who administers your account will conduct due diligence to ensure the funds granted go to an IRS-qualified public charity and will be used for charitable purposes.
What are the benefits of a donor-advised fund?
1. Easily contribute a wide range of assets
Giving non-cash assets is often more efficient than giving via cash or credit cards, but it is difficult for many charities to accept these donations. Contributing assets other than cash is simple with a donor-advised fund. In some cases, it is possible to transfer stock directly from your brokerage account with the click of a button.
Assets generally accepted include:
- Cash, such as checks, wire transfers or cash positions from a brokerage account
- Traded Securities or mutual fund shares (especially those that have appreciated)
- Restricted stock
- Bitcoin and other cryptocurrencies
- Private equity and hedge fund interests
- Certain complex assets, such as privately held C-Corp and S-Corp shares
2. Maximize potential tax benefits
Again, the donation is eligible for an immediate tax deduction, just as you would by donating to another qualified charity. But some donations could make you eligible for additional benefits.
If you donate cash, via check or wire transfer, you’re generally eligible for an income tax deduction of up to 60 percent of your adjusted gross income.
Donations of long-term appreciated assets
Donating long-term appreciated securities directly to the DAF—instead of liquidating the asset that will generate capital gains—can help maximize both your tax benefit and the overall amount you have to grant to charity. These donations provide two tax benefits:
- Become eligible for an income tax deduction of the full fair-market value of the asset, up to 30 percent of your adjusted gross income.
- Eliminate capital gains tax on long-term appreciated assets, as long as they’ve been held for more than a year.
3. Invest your donation for tax-free growth
Once you have funded your donor-advised fund, you may recommend an investment strategy for your account—potentially growing your account and providing you with more dollars to grant to charity. Many sponsoring organizations also have programs allowing you to nominate your financial advisor to manage the investment of your charitable funds.
4. Simplify recordkeeping and organization
With a donor-advised fund, you don’t have to keep track of every gift acknowledgment from every charity you support—just the receipts from your donor-advised fund contributions. When you’re ready to support your favorite charity, you can simply log in to your account and recommend a grant to any IRS-qualified public charity.
5. Support your legacy planning
You can incorporate your donor-advised fund into estate planning by making a bequest in your will to the donor-advised fund sponsor or by making the sponsor a beneficiary of a retirement plan, life insurance policy or charitable trust. By leaving instructions with the donor-advised fund sponsor, you can support multiple charities with one bequest. These gifts can also help reduce or eliminate the burden of estate tax for your heirs.
How can I use my donor-advised fund to support charities?
1. With a donor-advised fund, you generally CAN:
- Support IRS-qualified public charities with grant recommendations from the donor-advised fund.
- Choose whether to recommend anonymous grants to charity or to provide grant acknowledgment contact information with their grant recommendations. While donors choose to provide their names and addresses, donor-advised funds offer the option for anonymous granting for those who wish to recommend grants privately.
- Specify a specific use, campaign or purpose for your grant recommendation. When contributing to St Theresa, we encourage you to specify where the funding should be applied such as Weekly, Easter, Christmas contribution, Annual Catholic Appeal St Theresa Tuition Assistance, etc. Similarly, you may make grant recommendations “in honor of” or “in memory of” a loved one.
2. With a donor-advised fund, you generally CANNOT:
- Support organizations other than IRS-qualified, 501(c)(3) organizations, such as political groups or crowdfunding campaigns. Private foundations are also ineligible to receive donor-advised fund grants.
- Recommend grants that may provide a personal benefit—such as school tuition for a grandchild or tickets to a charity event that you will attend. Because you would receive something of personal value from these grants, they are not eligible, just like they would not be eligible for a tax deduction. Donor-advised fund dollars are to be strictly used for charitable purposes.
Example of tax affected DAF:
Assume you desire to give $1,000 per month to charities and you fund a newly formed DAF in November, 2023 with $24,000. Here is a very simple example of either donating $1,000 per month for 2 years or establishing a DAF in 2023 and disbursing $1,000 over the next 24 months.*
How is a donor-advised fund different from a private foundation?
Private foundations and donor-advised funds are both charitable giving vehicles that help donors facilitate their giving and achieve their philanthropic goals. Unlike donor-advised funds, private foundations are separate legal entities, generally established by an individual, family or corporation. Private foundations are subject to more stringent tax laws and regulations than public charities and are responsible for their own tax filing and recordkeeping. Benefits of a private foundation include greater administrative control over assets and grantmaking, including the ability to make grants to organizations other than IRS-qualified, 501(c)(3) public charities. With different structures, rules and features, donor-advised funds and private foundations each come with a unique set of advantages and limitations.
TIP: Though a donor-advised fund is not a foundation or a trust, many donors choose to grant from their donor-advised fund as they would from a family or private foundation. Because of this, some elect to use this language in naming their donor-advised fund.
Examples: The John Smith Giving Foundation, The Mary Jones Mission Trust