Qualified Charitable Distributions (QCDs) are a great way to reduce tax liability for those who are charitably inclined. Qualified Charitable Distributions are distributions from an IRA that are donated directly to a qualified charity. The account holder must be over age 70 ½ and the distribution cannot transfer to the account holder’s bank account first – it must go directly from the IRA to the qualified charity. If these conditions are met (along with a few others mentioned below), the distribution shifts from being taxed as ordinary income to not being taxable.
The Significance of Reducing Adjusted Gross Income
What’s so significant about this strategy is that a QCD is not counted toward Adjusted Gross Income (AGI). Typically, a donation is counted as a charitable deduction which only helps you if you’re itemizing deductions. However, that’s not the case with a QCD. This tax treatment is far more advantageous in reducing tax liability and in impacting other tax planning strategies compared to a below the line (itemized) deduction.
Reducing AGI is extraordinarily meaningful when planning around IRMAA brackets for Medicare premiums. Reducing AGI may also reduce the amount of Social Security income that is taxed. Furthermore, once you are age 72 when Required Minimum Distributions (RMDs) begin, a QCD can count toward your RMD amount.
Details on Executing Qualified Charitable Distributions
Note that QCDs for one taxpayer cannot exceed $100,000 per year and they cannot be transferred to a Donor Advised Fund. Additionally, if a distribution is counted as a QCD, it cannot also be counted as a charitable deduction. Lastly, when you receive a 1099-R for the year, it will be up to you to know how much of your distributions were QCDs. Be sure to keep records and file these distributions correctly on your tax return.
If you find yourself making charitable contributions and you are eligible for this strategy, consider the use of QCDs rather than donating cash from other accounts. We’re happy to have a conversation if you’re interested in learning more about this strategy and whether it’s right for you.
See our post from last week about another charitable giving strategy!
Hannah Szarszewski is a Certified Financial Planner(TM) professional and Accredited Financial Counselor® practitioner who helps clients with retirement planning and other financial issues. To learn more about her background and the Keener Financial Planning approach, please visit the Interview Hannah page.