Qualified Charitable Donations (QCDs) are not only a way to support great causes and people in need, they are also a way to control your taxes and avoid unexpected expenses.
For those who are at least 70 1/2 years old and don’t need the income from required minimum distributions (RMDs) (or simply want to avoid income taxes), QCDs are a useful retirement preparation tool.
What is a Qualified Charitable Donation (QCD)?
A qualified charitable distribution (QCD) is a distribution from an IRA that is sent directly from the plan administrator to a qualified charity.
Qualified charitable distributions are paid to satisfy the required minimum distribution (RMD) rules that, until recently, for traditional IRAs, began at age 72. (The RMD age increases to 73 in 2023 and will increase further to 75 in 2033.) Also, the money distributed does not count toward your adjusted gross income (AGI) as it does for regular distributions.
How can a qualified charitable donation help you save on taxes?
A qualified charitable distribution from a traditional IRA is a way to take RMDs without reporting them as income or paying any required taxes.
Thus, QCDs reduce your adjusted gross income (AGI) and generally provide a greater tax benefit than claiming your charitable contributions as a tax deduction (and you don’t have to itemize).
How do qualified charitable donations (QCDs) work?
QCDs are a way to reduce the tax burden of RMDs for seniors who don’t need the money as income and want to avoid paying more tax or being pushed into a higher tax bracket.
You make a QCD by instructing your IRA custodian to pay some or all of your RMD to a qualified 501(c)(3) charity.
What are the rules for QCD?
The rules for QCD aren’t overly complicated, but there are a few.
- You must be at least 70 1/2 years old to make a qualified charitable donation.
- To count the QCD towards your current year’s RMD, you must withdraw funds from your IRA by the RMD deadline, which for most people is December 31st.
- of The annual maximum amount subject to a QCD is $105,000.This applies whether you make one large donation or multiple smaller donations, with a combined annual maximum of $105,000.
- QCDs cannot exceed the amount taxed as ordinary income, meaning you can’t contribute more than you owe in tax and get a tax refund.
- If you are also considering contributing to an IRA, that contribution may reduce the amount of the QCD you can deduct.
Who can make qualified charitable donations?
Anyone with a traditional IRA who is over age 70 1/2 can make a QCD, but the rules for QCDs only apply to IRAs. do not have Applies to a 401(k), 403(b), SIMPLE, or SEP IRA.
Who can receive qualified charitable contributions?
A qualified charity is defined by the IRS as: Their list Types of organizations that qualify as eligible charities:
- Community Chest, Corporation, Trust, Fund, Foundation
- Churches, synagogues and other religious organizations
- Veterans Organizations
- Non-profit volunteer fire brigade
- Civil defense organizations established under federal, state, or local law
- Domestic fraternal organizations operated as lodges (but only if donations are used exclusively for charitable purposes)
- Non-profit cemeteries (but only if the funds are used to care for the cemetery as a whole and not specific graves)
Donations to state or federal governments also qualify as charitable donations if the donation is made strictly for a public purpose.
The IRS has Useful tools You can search for charities to see if they’re registered and accepting donations.
Can both members of a couple get the most out of QCD?
yes.
QCDs are limited to $100,000 per person per year. If a married couple each has an IRA, they can each contribute up to $100,000 from their own accounts. However, both parties must be over 70 1/2 years old.
So, if you’re married, each spouse can contribute up to $100,000 from their own IRA, for a large total contribution of $200,000.
What taxes are levied on QCDs?
Unlike distributions from a traditional IRA, distributions to qualified charities are not subject to federal or state withholding tax.
When reporting your donations as regular distributions, IRS Form 1099-R(This only applies to IRAs do not have Inheritance. If you make a distribution from an inherited IRA or an inherited Roth IRA, the charitable distribution is reported as a distribution at death.
Another great thing about QCDs is that you don’t have to itemize your tax return to benefit from them, meaning you can use your QCD for charitable giving while still taking advantage of the standard tax deduction passed in the Tax Cuts and Jobs Act of 2017 (TCJA).
Of course, the IRS won’t allow double-dipping: While the QCD amount isn’t taxed, you can’t claim the distribution as a charitable tax deduction.
One last bit of advice: When you make a QCD, be sure to get the same type of donation receipt (letter or receipt) that you would normally get when claiming a charitable contribution deduction on your taxes.
How to Model QCD in Boldin Retirement Planner
Interested in QCDs? Model your distributions in the Boldin Retirement Planner to see the tax and income implications and evaluate the short-term and long-term impact on your assets.
Should I do QCD?
Before modeling a QCD, you must first evaluate whether and when there is a financial benefit to performing a QCD.
The three most common scenarios can be easily assessed.
1. What I want to give: This consideration is simple: What do you want to give and when?
2. Should I use a QCD to reduce my taxable income and lower my tax rate? To do this assessment, go to the Insights > Taxes page and scroll down to the chart showing “Net Taxable Income by Federal Tax Rate Band.” In years where you fall into a higher tax rate band, we recommend using a QCD to reduce your income.
3. Do you waive RMDs because you don’t actually need the RMD income to cover projected expenses? To see if your RMDs are being used to cover your projected expenses, go to your Boldin Retirement Planner dashboard and look at the “Lifetime Retirement Projection” chart. See if your RMDs are listed above the expense line. If so, that means your RMDs are excess income and not needed to cover your planned expenses.
How to model QCD…
So once you identify an opportunity, you should run the scenarios in your planner to see the tax savings in action.
- Go to “My Plans” > “Withdrawals”
- Scroll down to “Are you planning on making a one-time withdrawal or distribution?”
- Click “Add another one-time withdrawal or payment.”
- Choose a tax-deferred IRA account for withdrawals
- For QCD, select “Deductible Expense.”
- Enter the amount you would like to donate via QCD
- Enter the age of your QCD payment
- Repeat this type of withdrawal for each year you wish to make
- As you model your QCD, you can see how your lifetime taxes will change. You can also evaluate the changes in the tax charts in Insights.
