How Can a Qualified Charitable Distribution (QCD) Help You Save on Taxes While Supporting Causes You Care About?
When planning for retirement, taxes can be a considerable concern. What if there was a way to both minimize your tax burden and support a charity at the same time? For individuals who are at least 70 ½ years old, Qualified Charitable Distributions (QCDs) offer an excellent opportunity to do just that.
But what exactly is a QCD, and how can it benefit you?
What Is a Qualified Charitable Distribution (QCD)?
A Qualified Charitable Distribution (QCD) is a direct transfer of funds from your IRA to a qualifying charity. Unlike regular withdrawals from an IRA, QCDs are excluded from income tax. This is a big advantage for retirees who don’t need the income from required minimum distributions (RMDs).
QCDs allow you to satisfy your RMD obligations while keeping your taxable income lower, which can potentially reduce your tax bracket and overall liability. In essence, it’s a way to redirect money that would otherwise increase your taxes toward a charitable cause, without that money ever appearing in your adjusted gross income (AGI).
Who Can Make a Qualified Charitable Distribution?
Not everyone can take advantage of a QCD. To be eligible:
You must be at least 70 ½ years old.
The QCD must be made from a traditional IRA (other retirement accounts like 401(k)s or 403(b)s don’t qualify).
The receiving charity must be qualified to receive a QCD. This means that the charity receiving the donation must be tax-exempt under Internal Revenue Code 501(c)(3), but not a donor-advised fund, private foundation, or supporting organizations. You should always check with the charity and your tax advisor to confirm eligibility of the recipient organization.
You can’t receive a benefit from the charity for the QCD, such as tickets to an event.
If you meet these requirements, you can make QCDs of up to $105,000 per year as of 2024. If you're married, each spouse can make their own QCDs from their individual IRAs, effectively doubling the potential donation to $210,000 annually.
Why Would You Consider a QCD?
There are two main reasons why people look into QCDs:
Tax Savings
Charitable Giving
Let’s break these down further.
How Does a QCD Save You on Taxes?
A Qualified Charitable Distribution (QCD) is a powerful tool for reducing your tax burden in retirement. It offers a straightforward and tax-efficient way to support charitable organizations while potentially lowering your taxable income.
Here's how QCDs can save you on taxes:
1. No Inclusion in Taxable Income
When you take a regular withdrawal from your IRA, that amount is included in your taxable income and subject to ordinary income tax rates. However, with a QCD, the funds transferred directly to a qualifying charity do not count as taxable income. This can significantly reduce your adjusted gross income (AGI), which is a key factor in determining various tax liabilities.
2. Avoid a Higher Tax Bracket
A lower AGI can prevent you from being pushed into a higher tax bracket. As retirees begin withdrawing from their IRAs, they may unintentionally increase their taxable income enough to cross into a higher bracket, leading to more taxes. By making a QCD, you can also satisfy all or a part of your required minimum distribution (RMD) obligations for a specific year without increasing your AGI. This keeps your tax rate more manageable.
3. Lower Medicare Premiums
Your Medicare Part B and Part D premiums are based on your income, specifically your modified adjusted gross income (MAGI). If your MAGI exceeds certain thresholds, you may be subject to Income-Related Monthly Adjustment Amounts (IRMAA), which increase your Medicare premiums. A QCD helps you keep your MAGI lower, potentially avoiding these extra charges.
4. Reduce Social Security Taxes
A lower AGI can also limit the taxes on your Social Security benefits. Depending on your total income, up to 85% of your Social Security benefits can be taxed. Since QCDs do not increase your AGI, they help you minimize or avoid this tax altogether. By making a QCD, you can ensure that more of your Social Security income stays untaxed.
5. Maximize Your Charitable Impact Without Itemizing
Another significant tax-saving advantage is that you don’t have to itemize deductions to benefit from a QCD. Many retirees now take the standard deduction due to changes in tax law, which means they can no longer deduct charitable contributions unless they itemize. A QCD bypasses this issue because the amount donated never counts as income in the first place. This allows you to enjoy tax savings while giving to your favorite charitable causes, even if you’re not itemizing your deductions.
In summary, a QCD offers a variety of tax benefits:
Lowers taxable income
Prevents bracket creep
Keeps Medicare premiums down
Reduces Social Security taxes
Maximizes tax benefits without itemizing
These tax advantages make QCDs an attractive option for retirees who want to make a difference while keeping their financial health on track.
How to Make a Qualified Charitable Distribution
The process of making a QCD is relatively simple. Here's what you need to do:
Contact your IRA custodian: Most IRA providers will have a form you need to fill out to initiate a QCD.
Specify the amount: You can donate any amount up to $105,000 per year.
Designate a qualified charity: Ensure the charity is eligible to receive QCDs (see discussion above on qualified charities).s.
Direct the funds: The funds must go directly from your IRA to the charity. You cannot withdraw the funds yourself and then donate them.
Be sure to request a receipt or acknowledgment from the charity to keep for your tax records.
Rules for QCDs
Although the concept of QCDs is simple, there are a few important rules to keep in mind:
Age: You have to be at least 70 and ½ years old when you do the QCD.
Deadline to count against RMD: The QCD must be made by December 31 to count toward that year’s RMD.
No Double Dipping: You can’t also claim the QCD as a charitable deduction on your taxes. The tax benefit comes from reducing your AGI.
Limits on QCDs: You can giveup to $105,000 per year via QCD.
IRA Only: QCDs are only allowed from IRAs. 401(k)s, 403(b)s, and other retirement accounts do not qualify.
Why QCDs Are a Great Tool for Reducing RMD Tax Burden
RMDs can be a headache for retirees, especially those who don’t need the extra income. Because RMDs are taxed as ordinary income, they can quickly push you into a higher tax bracket.
Let’s say you’re in a position where you don’t need your RMD for living expenses. A QCD allows you to fulfill all or a part of your RMD requirement (up to the QCD limit) without increasing your taxable income. Instead of paying taxes on the money, you can direct it to a charity and eliminate that tax burden altogether.
How QCDs Can Impact Your Overall Tax Situation
Lowering your AGI through QCDs can have broader benefits beyond just income taxes. For example, if your AGI is too high, it can increase your Medicare premiums and the amount of taxes you pay on Social Security benefits. By keeping your AGI lower, you can avoid these additional costs.
Moreover, the Tax Cuts and Jobs Act raised the standard deduction, making it harder for many people to itemize deductions. QCDs allow you to benefit from charitable giving even if you take the standard deduction.
How to Maximize the Impact of QCDs
You can use QCDs strategically to maximize the impact on your overall financial situation. For example:
Target years where your income is high: If you know that you will have higher-than-usual income in a particular year, you can use a QCD to keep yourself in a lower tax bracket.
Plan ahead for larger donations: Because QCDs allow for donations up to $105,000 per person, they can be an excellent way to make large, tax-efficient gifts.
Who Can Receive a Qualified Charitable Distribution?
Not all charities are eligible to receive a QCD. To qualify, the charity must be a 501(c)(3) organization, but not a donor-advised fund, private foundation or supporting organization. Common types of qualifying organizations include:
Churches or religious organizations
Nonprofit educational institutions
Public charities
Bottom Line
If you are at least 70 ½ years old, have a traditional IRA, and are interested in charitable giving, a Qualified Charitable Distribution could be a win-win for both you and the charity you want to support. By reducing your taxable income, avoiding unnecessary RMD taxes, and still supporting a worthy cause, QCDs are one of the best tools retirees have at their disposal.
Want to see how much a QCD can impact your taxes? Try modeling the distribution in a retirement planner tool to assess the benefits of your overall financial situation.
If you’ve never used QCDs before or are unsure how they fit into your retirement plan, it’s always a good idea to speak with a financial planner or tax advisor. They can help ensure that you meet all the requirements and get the maximum benefit from your QCD.
In summary, a QCD allows you to meet your RMD requirement, save on taxes, and support the causes you care about—all while keeping your retirement plan on track. Isn’t it time you explored this smart giving strategy?
Reference
Internal Revenue Service. (n.d.). Qualified Charitable Distributions Allow Eligible IRA Owners Up to $100,000 in Tax-Free Gifts to Charity. Retrieved from https://www.irs.gov/newsroom/qualified-charitable-distributions-allow-eligible-ira-owners-up-to-100000-in-tax-free-gifts-to-charity
Investopedia. (n.d.). Qualified Charitable Distribution (QCD). Retrieved from https://www.investopedia.com/qualified-charitable-distribution-qcd-5409491
Internal Revenue Service. (n.d.). Reminder to IRA Owners Age 70½ or Over: Qualified Charitable Distributions Are Great Options for Making Tax-free Gifts to Charity.
Internal Revenue Service. (n.d.). Retirement Plan and IRA Required Minimum Distributions FAQs.
American Red Cross. (n.d.). Qualified Charitable Distributions. Retrieved from https://www.redcross.org/donations/ways-to-donate/qualified-charitable-distributions.html#:~:text=A%20qualified%20charitable%20distribution%20(QCD,as%20the%20American%20Red%20Cross.