It is important for older individuals and retirees to be mindful of potential tax advantages that can help optimize their financial situations. There are various tax strategies that retirees can take advantage of. One common tax strategy is the Qualified Charitable Distribution (QCD).
What is a Qualified Charitable Distribution?
A Qualified Charitable Distribution is a tax-efficient method for individuals who are 70½ years old to make charitable contributions to qualified charitable organizations directly from their Individual Retirement Accounts (IRAs). Individuals and retirees over the age of 70½ or approaching this age should strongly consider this method as part of their estate and tax planning, as it can have many benefits.
Qualified Charitable Distributions vs. Charitable Deductions
It is also important to know the difference between a Qualified Charitable Distribution and a charitable deduction. A QCD is a direct transfer of funds from your IRA to a qualified charity. Charitable deductions come from the total of charitable contributions during a tax year, which can be made monetarily from other accounts or in the form of donated items.
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Benefits of a Qualified Charitable Distribution
Fulfilling Required Minimum Distribution (RMD) Requirements
When individuals reach the age of 70½, they are required to take withdrawals from their Traditional Individual Retirement Accounts annually. A Qualified Charitable Distribution can satisfy this minimum requirement, while also allowing taxpayers to support charitable causes.
Tax Efficiency
Distributions from a traditional IRA are taxable. However, contributions made through QCDs are excluded from taxable income. As a result, taxpayers can reduce their Adjusted Gross Income (AGI) and may avoid being pushed into higher income tax brackets and prevent phaseouts of other tax deductions. Each year, an IRA owner age 70½ or over can exclude from gross income up to $100,000 of these QCDs. For a married couple, if both spouses are age 70½ or over and both have IRAs, each spouse can exclude up to $100,000 for a total of up to $200,000 per year.
Avoidance of Charitable Contribution Limits
The amount an individual can deduct for charitable contributions is typically subject to limitations based on the individual’s Adjusted Gross Income. This limitation ranges from 20% to 60% depending on the type of asset that is donated. Qualified Charitable Distributions are not subject to these AGI limitations, paving a way for individuals to make larger charitable contributions without facing deduction limitations.
Supporting Charitable Causes
QCDs allow individuals to support a charitable organization they strongly care about while also maximizing tax benefits.
It is important to determine if a QCD makes sense for you. It is most suitable for taxpayers who are required to take a minimum distribution from an IRA, but do not need the funds and would face increased tax liabilities if they took the distribution as income. There are also several IRS rules and guidelines with respect to setting up a QCD and how it needs to be reported. It is important to consult with a tax professional or financial advisor before considering a QCD.
Are you unsure if a QCD is an effective strategy for your charitable giving? Contact our team at Evolved for a deeper look into your options.
Evolved is a tax compliance and advisory firm with offices in New York City, Stamford, and Philadelphia, and clients nationally throughout the US. We provide tax provision, private equity and venture capital services alongside advisory for high net-worth tax and family office tax.
