Individual Retirement Accounts (IRAs) are for people over the age of 70.5 years old. Unlike other distributions, which are taxed at ordinary income tax rates, Qualified Charitable Distributions (QCDs) allow for a tax-free distribution from an IRA, provided that the distribution goes directly to a qualified charity.
To be eligible for a QCD, several rules must be followed. Firstly, the taxpayer must be at least age 70.5 at the time of the distribution, and the distribution must be from an IRA account.
Secondly, the charity receiving the distribution must be a qualified charity. Donor Advised Funds or private foundations do not qualify for this purpose. Lastly, QCDs cannot exceed $100,000 per taxpayer, per year. However, starting in 2024, this figure will be indexed to inflation as per the Secure Act 2.0.
Once you reach the eligible age, there are some mechanics to consider before you start making QCDs. The funds must be sent directly from the IRA to the charity. A distribution to you that you then send to a charity will not count as a QCD. It’s important to note that IRA custodians do not report QCDs as tax-free withdrawals. These transactions will show up as taxable distributions on the Form 1099-R that the custodian will prepare. It will be up to your tax preparer to mark the QCDs as tax-free.
In some cases, it might be beneficial to explore getting a dedicated checkbook from your IRA custodian for this purpose. This would allow you to make direct donations from the IRA. However, special care must be taken to avoid accidentally writing checks for other purposes from the IRA.
Additionally, the charitable contributions arising out of QCDs should not be captured as an itemized deduction on Schedule A of the tax return as doing so would represent double-counting.
So, why are QCDs better than itemized charitable donations? There are several reasons. In some cases, a QCD can lower taxable Social Security. It allows more of one’s itemized medical expenses to be deducted. It lowers the income used to calculate Medicare Part B and D premiums. QCDs count toward your required minimum distributions.
It lowers one’s Modified Adjusted Gross Income, which impacts eligibility for a number of credits and impacts the Net Investment Income Tax.
Lastly, the standard deduction is high enough that even with charitable contributions, not all taxpayers will claim itemized deductions.
As you plan your personal giving throughout the year, keep these points in mind. Being prepared and understanding the benefits of QCDs can help you make the most of your charitable contributions while also reaping significant tax benefits.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities and financial planning offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.