Qualified Charitable Distributions
For many taxpayers, the increased standard deduction has all but eliminated any tax benefit once derived from charitable contributions. Considering this, one strategy is to utilize Qualified Charitable Distributions or QCDs.
If you are age 70.5 (70 and one-half) or older by the end of 2022, you can make a distribution to charity directly from your traditional IRA(s). Directly is an important part of this process; The contribution must go directly from your IRA. In other words, the money cannot hit your “hands” or bank account. Your IRA fiduciary should create a check payable to the charity of your choice.
This has many benefits! First, the charitable distribution is not included in your income (Adjusted Gross Income or AGI). Keeping your AGI lower has many benefits such as the taxability of social security, Medicare Part B premiums, the ability to deduct rental losses, and many others. A QCD will also count towards your required minimum distribution (RMD) for the year!
Now, since you were not required to include the distribution in income, you cannot take a charitable deduction for that contribution. However, since many individuals cannot itemize anyway, you have essentially created a charitable deduction by not including the withdraw in income!
Things to note and keep in mind:
- At present, you are limited to an annual QCD of $100,000. A spouse can also make use of the $100,000 limit.
- You will need to keep good records for each QCD executed. At year end, the tax document sent to you will include all distributions. Your tax preparer will “net” the qualified charitable distributions against the gross amount.
- A QCD will count towards your required minimum distribution (RMD) for the year.
- Any amount donated above your RMD does not count towards a future year’s RMD.
- The funds must go directly to the charity. Any funds distributed to you and then sent to charity, will not qualify as a QCD.
- The charity must be a 501(c)(3) to qualify. (I.e. No private foundations or donor advised funds)
If you still have questions, we would be happy to setup a time to discuss this further.