This strategy is only available for those with certain types of retirement accounts (see below), and who have reached age 70½.
If you qualify, the upside is that gifts you make to charities structured this way are not treated as taxable income, unlike regular withdrawals from an IRA. So you can reduce your taxable income while maximizing your donations.
Even better, QCDs do not require that you itemize your deductions. Many people found they were no longer able to itemize their deductions after the 2017 Tax Cuts & Jobs Act nearly doubled the standard deduction, and eliminated certain other itemized deductions. For those who take the standard deduction, a QCD can still be utilized for charitable giving and provide a tax benefit. Furthermore, taxpayers who can still itemize their deductions should consider the use of QCDs. Even though a QCD does not count as an itemized deduction, taxpayers who itemize still benefit because an exclusion lowers your adjusted gross income (AGI). This makes it preferable to a deduction because your AGI is the figure often used when determining other metrics, such as what your Medicare Part B premiums will be for subsequent years.
It is important to note that you cannot take a charitable deduction on your tax return for gifts to charities made with QCDs. It is one or the other — no double dipping.
QCDs as all or a portion of your RMD
QCDs have been a great way to help reduce your taxable income once you are required to take distributions from your IRA. However, as of January 1, 2023, there is a slight timing disparity — the RMD age has been increased, but the QCD-eligibility age remains at 70 ½. The changes are as follows:
Those born in 1951-1959 will need to start their RMDs in the year they turn age 73.
Those born in 1960 or after will need to start their RMDs in the year they turn age 75.
Given the new timing disparity, the question becomes, should I utilize QCDs before RMD age? This should be determined on a case-by-case basis, but there could still be value in starting QCDs even before your RMDs have commenced.
Which IRAs are eligible?
Traditional, Rollover, Inherited, SEP (inactive plans only), and SIMPLE (inactive plans only) IRAs qualify as non-taxable, as long as you meet these requirements:
- You must be 70½ or older.
- QCDs are limited to the amount that would otherwise be taxed as ordinary income, excluding non-deductible contributions.
- The total sum of QCDs made to one or more charities in a single calendar year may not exceed $100,000. If, however, you file taxes jointly, your spouse can also make a QCD from his or her own IRA within the same tax year for up to $100,000.
- For a QCD to count towards your current year’s RMD, you must disburse the funds out of your IRA by your RMD deadline, which is typically the end of the year. Ideally, the charity should cash the QCD check by December 31.
- The check for the donation cannot be made payable to you as the IRA owner. It must be made payable directly to the charitable entity. Even though the check must be made payable to the charity, most IRA custodians will insist on mailing the check to the IRA owner to then send along to the charity. To ensure everything is handled before December 31, we would encourage you to process your QCDs earlier in the calendar year.
Bear in mind that the aggregate amount of deductible IRA contributions you make to your IRA after you turn 70 ½ will reduce the amount of the QCD that is not includible in your gross income.
Other points to note are that any amount donated above your RMD does not count toward satisfying a future year’s RMD. Also, if you receive funds distributed directly from your IRA and then give that money to charity, it will not qualify as a QCD.
Although a QCD is permitted from a Roth IRA under certain circumstances, most distributions from a Roth IRA are already tax-free and therefore QCD rules wouldn’t apply in any case.
Which charities qualify?
Generally, any 501(c)(3) organization eligible to receive tax-deductible contributions qualifies, with the following exceptions:
- Private foundations.
- Supporting organizations: i.e., charities carrying out exempt purposes by supporting other exempt organizations, usually other public charities.
- Donor-advised funds, which public charities manage on behalf of organizations, families, or individuals.
If you are interested in exploring the benefits of QCDs, please let us know. We look forward to addressing any questions you have regarding gifts to charities as well as any other tax or financial questions.