Understand How to Benefit from this Tax-Saving Tool
Giving with Greater Benefits
Are you 70 ½ or older and do you have an IRA? Do you have charitable intentions for your current or future required distributions? Consider the use of a qualified charitable distribution (QCD).
With QCDs, an IRA owner or beneficiary over age 70 ½ can donate up to $108,000 directly from an IRA to a charity without getting taxed on the distribution. A QCD can be used to satisfy part or all of your required minimum distribution (RMD) up to the QCD limit of $108,000.
Donating IRA funds directly to qualified charities allows the IRA owner or beneficiary to avoid taking possession of the funds and the tax bill that comes with it. Another benefit of the QCD is potentially reducing taxation of other sources of income, such as Social Security and the Medicare net investment income tax, while also potentially reducing Medicare Part B and D premiums.
How It Works
The QCD must be paid directly to the charity, which must be a qualified 501(c)(3) institution eligible to receive tax-deductible contributions.
A QCD cannot be made to a private foundation, donor advised fund, or supporting organization (as described in IRC 509(a)(3)). However, the SECURE 2.0 Act of 2022 allows a QCD to be directed to a split interest entity such as a charitable gift annuity or charitable remainder trust provided several conditions are met (not discussed here).
The charitable entity, as the recipient of the QCD, must receive the donation by December 31 in order to ensure tax reporting for the proper year.
Comparing the Benefits of QCD and Non-QCD Strategies
Aside from the philanthropic benefits, another benefit of charitable giving is the ability to deduct the contribution and reduce your taxable income. However, in order to deduct the contribution, a taxpayer must itemize deductions on their tax return, rather than use the standard deduction.
- If all itemized deductions (including the charitable gift) don’t exceed the standard deduction, there is little tax benefit to making a gift.
- While a gift of cash is fully deductible, it can only be applied up to 60% of a taxpayer’s adjusted gross income (AGI) for the year.
- Any portion of the gift that cannot be applied in the current tax year can be carried forward five years to offset future income.
With a QCD, an IRA distribution that would normally be taxed at ordinary rates is directed to the charity without any associated tax liability to the IRA owner.
Key benefits of a QCD include:
- No need to itemize deductions for it to be excluded from income.
- Flexibility to both do a QCD and itemize deductions for additional tax savings.
- No AGI constraints—the full amount up to $108,000 is excluded from income.
- Potential reduction of taxation on Social Security, the Medicare net investment income tax, and Medicare premium surcharges.
Next Steps
Qualified Charitable Distributions can be a powerful tool for both tax planning and philanthropy, but the rules are complex.
Click below to view or download a detailed Raymond James information sheet on QCDs for examples, tax filing guidance, and a comparison of QCD versus non-QCD strategies.
For help understanding how QCDs might fit into your broader retirement and charitable giving strategy, contact a Lead Advisor at Voyager Wealth Advisors. We’ll walk you through the details and help you decide if this strategy is right for you.
