In today’s world, it’s important to plan your finances wisely. Creative charitable giving strategies, such as Qualified Charitable Distributions (QCDs) are a way to increase your charitable impact while reducing potential taxes.
What’s a Qualified Charitable Distribution (QCD)?
It’s a direct transfer from your IRA to a qualified charity that counts towards the money you’re required to withdraw (called Required Minimum Distributions or RMDs) from your IRA. This can reduce your current tax bill, prevent you from moving into a higher tax bracket and potentially reduce Medicare premiums. Plus, QCDs don’t require you to itemize your deductions, which may allow you to take advantage of the higher standard deduction while still claiming the charitable deduction.
Eligible Organizations
Your charity must be a 501(c)(3) organization that can receive tax-deductible contributions. Private foundations, supporting organizations, and Donor-Advised Funds are not eligible.
Criteria for You
- You must be 70 ½ years old or older
- QCDs must come from the portion of your IRA that would be taxed as regular income (excludes non-deductible contributions)
- The annual maximum distribution for a QCD is $105,000 per person across all organizations
- To count toward your current year’s RMD, funds must be withdrawn by December 31st (RMD deadline)
- 401ks are not eligible for QCDs
Tax Implications
- Funds donated beyond your RMD amount don’t count toward future RMDs
- Funds distributed to you and then donated don’t qualify as QCDs; they must go directly from your IRA to the charity
- You must receive an acknowledgment of donation from the charity to claim the charitable deduction
- QCDs are not subject to tax withholdings
Example of QCD using Standard Deduction
Michael and Megan are retired and have a steady income. They get $60,000 from Social Security and $40,000 from Michael’s pension each year. Because they’re over 70.5, they have to take $40,000 out of their IRAs. So, their total income is $140,000.
They give $10,000 to charity annually, but they don’t get a tax break for it because they take the standard deduction. That means they pay $2,200 in Federal Income taxes. But if they did a QCD, they could send that $10,000 straight to charity from their IRA, which would lower their taxes by $2,200.
Talk to your financial and tax advisors to ensure this strategy aligns with your unique situation. Happy charitable giving!
Disclosure
All examples are hypothetical and are for illustrative purposes only It does not reference any specific investment; individual results will vary. All investing involves risk including loss of principal. The information provided has been derived from sources believed to be reliable, but the accuracy is not guaranteed and does not purport to be a complete analysis of the material discussed. The material is for informational purposes only and is not intended provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation, or needs of individual investors. This information is not intended for use as tax advice. Persons should consult with their own tax advisors for tax advice.
