Qualified Charitable Distributions – What are they and how can I use them?

Qualified Charitable Distributions

Qualified Charitable Distributions – What are they and how can I use them?

A Qualified Charitable Distribution (or QCD) is a distribution from an IRA account made directly to a charity.  The amount that is donated is excluded from taxable income and if over the age of 72 the amount counts towards your required minimum distribution for the year.

Who can make a Qualified Charitable Distribution?

In order to make a qualified charitable distribution, a few requirements must be met:

  • The account owner must be over the age of 70 ½ 
  • The distribution must be made from either an IRA, Inherited IRA, or an inactive SEP or SIMPLE IRA
  • The maximum amount that can be given is $100,000 per person (married couples can each give up to $100,000)

Notably, this type of distribution cannot be made from an employer sponsored account like a 401(k) or 403(b).  If funds held in these type of accounts were desired to be given the account would first need to be rolled over into an IRA and then could be donated.

What are the tax benefits?

Generally speaking, a charitable donation would be an itemized deduction and benefits those that have total itemized deductions exceeding the standard deduction ($27,700 for married filing jointly, $13,850 for single filers in 2023).  

A qualified charitable distribution is instead excluded from income altogether.  This is advantageous because it ensures you receive the tax break regardless of whether you itemize for the year.  Additionally, excluded income is not counted in your modified adjusted gross income calculation for your Medicare surcharges (IRMAA) whereas an itemized charitable deduction would be.

Example: John and Jane expect to have taxable income of $185,000 in 2023.  Jane has an IRA with an RMD of $10,000 that they do not need.  With their home paid off and low healthcare expenses, they do not anticipate itemizing their taxes this year.  They choose to take a qualified charitable distribution and gift the $10,000 from Jane’s IRA, satisfying her RMD.  This allows them to exclude the income saving them $2,200 on their income tax bill as that income would have fallen into the 22% tax bracket.  Additionally, by utilizing the QCD they did not go over the next Medicare surcharge threshold ($194,000 for MFJ in 2023) saving them an estimated $790 in additional premiums in 2025 when their 2023 income would be used to determine Medicare surcharges. 

Who can receive a Qualified Charitable Distribution?

In order to receive a QCD, a charity must be a 501(c)3 charitable organization.  The following charities do not qualify to receive QCD’s:

  • Donor-Advised Funds
  • Private Foundations
  • 509(a)(3) Supporting Organizations – these are charities that carry out their exempt purposes by supporting other tax-exempt organizations

The organization must receive the check directly from your IRA, meaning you cannot take a distribution from your IRA and then subsequently gift the amount to charity.

How does it get reported?

If you complete a QCD your 1099-R will still report the amount as a normal distribution.  To ensure you receive proper credit for the donation, you will want to request an acknowledgement of the donation from the charity and provide that along with the details of the gift to your tax preparer.

Read our overview of 5 ways to give more tax efficiently here.

If you have questions about QCD’s and how they fit into your financial plan, schedule an introductory call here.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Examples presented above are for illustrative purposes only.

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