In most cases, distributions from a traditional Individual Retirement Account (IRA) are taxable in the year you receive them, but there are some exceptions. A qualified charitable distribution (QCD) is one of these exceptions, and this opens up the possibility of using a QCD to reduce your taxes.
A QCD is a nontaxable distribution made directly by the trustee of your IRA to charitable organizations that are eligible to receive tax-deductible contributions. QCDs can’t be made from Simplified Employee Pension (SEP) plans and Savings Incentive Match Plan for Employees IRA.
Making a QCD can benefit you by reducing your taxable income while at the same time supporting your favorite charitable organizations. Best of all, you don’t have to worry about meeting the standard deduction or itemizing deductions with a QCD.
If you are thinking about making a qualified charitable contribution, keep the following guidelines in mind.
- To make a QCD, you must be at least 70½ years old on the day of the distribution.
- A QCD will count toward your required minimum distribution (if any).
- You must have an acknowledgement of the contribution
- The amount of the QCD can’t be more than the amount of the distribution that would count as income.
- You must declare the QCD as income to claim the charitable contribution as a deduction.
- The maximum annual exclusion for QCDs is $100,000 for individuals, or $200,000 for joint returns.
- The amount of QCD contribution limits for exclusion reduce after age 70½.
If you would like more information about qualified charitable distributions, or held determining if you might be able to take advantage of them, please contact our office. We would be happy to help.
If you are an employer, be careful about third parties that may advise you to claim the employee retention credit (ERC) when you don’t qualify. Some third parties are taking positions related to taxpayer eligibility for and computation of the credit that can’t be supported. This could spell trouble for employers that use these third parties to claim an ERC that they are not entitled to.
Many of these businesses charge large upfront fees or a fee that is contingent on the amount of the refund that you receive. They may also fail to inform you that wage deductions claimed on your business’ federal income tax return must be reduced by the amount of the credit.
If your business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction.
If you are a business owner, be cautious of schemes and direct solicitations promising tax savings that are too good to be true. You are responsible for the information reported on your tax returns, so if you improperly claim the ERC you could be required to repay the credit along with penalties and interest.
What is the employee retention credit?
The ERC is a refundable tax credit for businesses who continued paying employees while shutdown due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to December 31, 2021. Eligible taxpayers can claim the ERC on an original or amended employment tax return for a period within those dates.
To be eligible for the ERC, you must be an employer who meets one the following conditions:
- You sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021
- Your business experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021
- Your business qualified as a recovery startup business for the third or fourth quarters of 2021.
Only recovery startup businesses are eligible for the employee retention credit in the fourth quarter of 2021.
Eligible employers cannot claim this credit on wages reported as payroll costs to get PPP loan forgiveness or that they used to claim certain other tax credits at any time.