Qualified Charitable Distributions (QCDs) can be a powerful tool for clients aged 701/2 and older who are interested in optimizing charitable giving while also improving their tax situation. When used correctly, a QCD allows IRA owners to directly transfer up to $105,000 (2024limit) per year, directly to a qualifying 501(c)(3) charity, and this amount counts toward their required minimum distribution (RMD) without adding to their taxable income.
What is a QCD?
A QCD is a direct transfer from an individual’s IRA to a qualified charity, bypassing the account owner. Direct transfer is crucial. If the client takes receipt of the funds before donating, the distribution is counted as income and taxed accordingly. The account owner can receive the funds in a check form and deliver it themselves, if the check is made out directly to the charity and not the account owner.
Major Benefits of QCDs
- Reduction of Taxable Income: Since a QCD is excluded from taxable income, it can significantly lower a client’s adjusted gross income (AGI). This exclusion may not only reduce a client’s overall tax liability but also keep them from creeping into higher tax brackets.
- Satisfy RMD Requirements: For clients aged 73 or older, a QCD counts toward their RMDs, helping fulfill the IRS requirements in a tax-efficient way. Instead of taking an RMD and writing a check to charity afterward, which leaves the client with taxable income, the QCD achieves the same charitable result with greater tax efficiency.
- No Need to Itemize: QCDs provide a charitable benefit even if clients do not itemize deductions, which is especially key since most taxpayers now take the standard deduction.
- Impact on AGI-Sensitive Calculations: Because QCDs reduce AGI, they can help lower Medicare premium surcharges, reduce taxable Social Security, and potentially mitigate the impact of other AGI-based thresholds and credits.
- Expanded Charitable Impact: QCDs allow clients to maximize charitable contributions-rather than donating after-tax dollars, every dollar of the RMD can go directly to charity, increasing the net impact of the client’s giving.
Important Considerations
- Eligible Accounts: QCDs can only be made from IRAs (not 401)k)s or other workplace plans) and must go directly to the charity.
- Qualified Charities: The receiving organization must be a 501(c)(3) public charity. Donor-advised funds and private foundations are not eligible.
- Correct Execution: The transfer must be arranged through the IRA custodian and completed by December 31st for it to count toward that year’s RMD.
- Documentation: Proper paperwork is essential to substantiate the charitable transfer for both IRS compliance and tax reporting.
In summary, QCDs-when executed properly-offer win-win for clients looking to satisfy RMDs, lower AGI, and make an immediate and meaningful charitable impact.
When you file your federal tax return (Form 1040), you must inform the IRS that a portion of your IRA distribution was a tax-free QCD. An IRA custodian will issue a Form 1099-R showing the full gross distribution, so it is your responsibility to make the distinction.
For any charitable gift of $250 or more, the donor must receive a written acknowledgment from the charity to substantiate the contribution. For a QCD, this acknowledgment must confirm that the gift was a tax-free IRA transfer and that the donor received no goods or services in return.
