Qualified Charitable Distributions (QCDs) allow IRA owners who are at least age 70½ to make charitable gifts directly from their IRA, excluding the distribution from income. Even though the Tax Cuts and Jobs Act increased the standard deduction, making it less likely that most taxpayers will itemize deductions, QCDs still provide a tax benefit by keeping income lower and preserving flexibility. QCDs can be used to satisfy required minimum distributions (RMDs) tax-free while supporting charities you care about. The annual QCD limit adjusts for inflation. For most taxpayers, QCD limits are generous enough to support significant annual charitable giving.
QCDs Becoming More Useful
QCDs are a powerful retirement planning tool that let you support charities while managing your taxable income and RMDs. Because of the higher standard deduction (currently $32,200 for married couples), most taxpayers now take the standard deduction rather than itemizing. This makes QCDs especially valuable: you can donate from your IRA and exclude the distribution from income, effectively "beating" the standard deduction from a tax-planning perspective. An example of a beneficial use of a QCD would be to satisfy your required minimum distribution (RMD) through a charitable donation—the funds go directly to charity and you owe no tax on the distribution. The law allows those over age 70½ to make gifts directly to qualified charities while excluding the distributions from gross income. Understanding RMDs (which currently begin at age 73) is critical to your retirement distribution planning strategy.
This strategy was not commonly used in the past because there was no itemized charitable income tax deduction for a gift from an IRA. So, it made more sense for tax filers itemizing to donate directly to a charity and deduct the donation. However, since almost all will be taking advantage of the higher standard tax deduction, the use of QCDs has been and will be more advantageous.
QCDs May Have a Double Benefit
QCDs may also reduce Medicare premiums. High-income filers can watch their Medicare premiums increase by hundreds of dollars every time their income peeks just 1$ above the predetermined income levels. A high-earning couple in their 70s may use a QCD to reduce their premiums now and in future years.
Requirements for QCDs
When you attempt to make a QCD, it's wise to remember the requirements that are to be met to ensure that the contribution does indeed qualify for this special treatment. Here are the qualification rules:
- The check for the QCD must be made payable to the charity directly from your IRA account.
- Donations to private foundations and donor-advised funds do not qualify for QCDs. The charity must be classified as a 501(c)(3).
- The donor must check with their custodian to see if any other specific forms or requirements are necessary to make a valid QCD.
QCDs remain one of the most tax-efficient giving strategies available to retirees. Those over age 70½ can benefit by taking the standard deduction and simultaneously getting a tax benefit for charitable giving by using a QCD, effectively optimizing both their charitable intent and their tax situation.
QCDs are just one piece of a broader tax-centric retirement strategy. They work alongside other tools like Roth conversion strategies to optimize your tax efficiency in retirement.
QCDs are just one piece of a broader retirement tax strategy. For a holistic approach to tax-efficient giving and retirement planning, start a conversation with our team.
