Qualified Charitable Contributions: What They Are
Once you turn 70 ½ you become eligible to make tax-free donations directly from IRA accounts to qualified charities. These distributions, commonly referred to as QCDs, can provide significant tax benefits by directly reducing dollar-for-dollar the amount of taxable income on your 1040. Regardless of whether you itemize or take the standard deduction, QCDs can offer significant tax benefits. For example, when a QCD is taken from a pre-tax retirement account, due to the pre-tax nature of the balance, tax is potentially never paid on the account funds.
The distribution must be made directly from the IRA trustee (ie. Charles Schwab, Vanguard, Fidelity, etc.) to the qualifying charity to be considered a QCD for tax purposes. If at any point the funds pass through the individual’s personal bank account, they are no longer eligible for QCD treatment.
Qualified Charitable Contributions: What To Know
The Process
You will want to reach out to your plan provider to determine its specific process, but QCDs are generally initiated by contacting the plan administrator and providing any relevant details such as the amount, the charity, and the date of the transfer. Examples of qualifying charities include churches and other religious organizations, nonprofit schools and hospitals, war veterans’ groups, and other recognized charities.
Required Minimum Distributions (RMDs)
QCDs also provide the benefit of counting towards annual RMD for individuals aged 73 or older. Taking advantage of one or more QCDs can help reduce taxable income by satisfying, in part or in whole, an individual’s RMD requirement through his or her charitable giving.
Annual Limits
For 2024, the annual QCD limit is $105,000 per person. Married couples filing jointly can each make QCDs from their own IRAs, allowing for a combined limit of $210,000 in 2024. The dollar amount limit is subject to annual adjustments based on inflation and can be found on the IRS website.
Adjusted Gross Income (AGI) and Net Investment Income Tax (NIIT) Impacts
QCDs do not increase AGI. By maintaining a lower AGI, you can reduce your amount of taxable Social Security and even lower your Medicare premiums. A lower AGI can help you to qualify for tax benefits that might be otherwise limited by AGI-based phase-outs. Finally, a lower AGI can limit potential exposure to NIIT, further increasing tax savings.
Remember to plan ahead and contact your IRA trustee early in order to complete your transaction before the end of the calendar year. QCDs must be reported on the tax return for the year in which the distribution is made. Then, be sure to provide your tax advisor with any documentation from your IRA trustee so you can receive the benefit you are owed.
An enhanced understanding of QCDs is sure to aid your decision-making process as you consider both your financial and charitable ambitions. To further discuss QCDs or determine with a financial or tax advisor whether QCDs are right for your unique financial situation, be sure to reach out.