As a financial planner, I have seen many people who are passionate about giving back to their communities and supporting charitable organizations. However, many of them are not aware of the tax benefits of qualified charitable distributions (QCDs) and how they can make a significant impact on their finances. Here are the main things you need to know about QCDs and how they work.
What is a QCD?
A qualified charitable distribution (QCD) is a way to distribute money tax-free from your IRA directly to the charity of your choice. You can support your favorite charitable organizations while also reducing your taxable income.
How do QCDs work?
When you make a QCD, the distribution is sent directly from your IRA to the qualified charitable organization of your choice. The distribution is not included in your taxable income, so you are not required to pay taxes on the distribution. QCDs can be made up to $100,000 per year per individual, and they count towards your required minimum distribution for the year. Note: the RMD age is now 73, while the QCD age is 70 1/2.
Tax Benefits of QCDs
QCDs offer several tax benefits that make them an attractive option for charitable giving. First, they allow you to help satisfy your required minimum distribution while also supporting charitable organizations. Second, QCDs are excluded from your taxable income, which can lower your overall tax liability. This can be especially beneficial for individuals who are subject to higher tax rates. Third, QCDs can help you reduce your adjusted gross income (AGI), which can impact taxes in other areas. Finally, QCDs can help you reduce your taxable estate, which can be beneficial from an estate planning perspective.
Requirements for Making QCDs
To make a QCD, the you must be at least 70 ½ years old and have an IRA account. The QCD must be made directly from your IRA to a qualified charitable organization. The maximum amount of the QCD is $100,000 per year per individual. The QCD must be made by December 31st of the tax year in which it is being claimed. The QCD must be made to a qualified 501(c)(3) organization, and you must obtain a receipt to document the donation.
5 Star Tip: Don't wait until December to start this process in case of delays.
Examples of QCDs in Action
Here are some examples of how QCDs can be used to support charitable organizations:
An individual is age 73 and has a required minimum distribution of $50,000 for the year. He can make a QCD of $20,000 to his favorite charity, which counts towards his RMD. The $20,000 is excluded from his taxable income, which can lower his overall tax liability for the year.
An individual is age 70 1/2, has an IRA worth $1 million and wants to support a charitable organization. Even though she is under the age for RMDs (age 73), she can make a QCD of up to $100,000 to the organization, which is excluded from her taxable income. The QCD also helps reduce her taxable estate, which can be beneficial from an estate planning perspective.
5 Star Tip: QCDs taken under age 73 do not count towards future RMDs (in case you were curious).
The Wrap: QCDs are a Smart Financial Move
Qualified Charitable Distributions are a tax-efficient way to support your favorite charity while reducing your taxable income. They offer tax benefits for individuals who are over 70 ½ with an IRA, and can also help fulfill your RMD if you are over age 73.
Contact me today to learn more about the process, potential tax benefits and how QCDs can benefit your financial planning and charitable giving goals.
John Piershale, CFP®, AEP®
John Piershale Wealth Management, LLC is an Investment Adviser registered with the State of IL and in other jurisdictions where exempt from registration. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.