Our company and clients have a deep history of charitable giving and, as we expand to include more nonprofit investing services, we’re helping both donors and recipients structure that support to maximize benefit. As we start planning for the 2024 tax year, it’s a good time for a closer look at qualified charitable distributions – or QCDs.
The IRS defines a QCD as “an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity.” These donations can be up to $100,000 per year, per taxpayer for 2023 and will increase to $105,000 in 2024.
For those who are over age 73 and must take a required minimum distribution (RMD) from an IRA, a QCD can satisfy all or part of that minimum distribution.
The standard deduction is a specific dollar amount that reduces the amount of income on which individuals are taxed. Taxpayers can decide to itemize deductible expenses or use the standard deduction, which, for married taxpayers in 2023, is $27,700.
A great benefit of making a QCD rather than a cash gift to a qualified charity is that, in some cases, one may stack the QCD amount on top of the charitable donation amount to further reduce taxable income.
For example, a couple making $100,000 a year who want to make a $5,000 donation through a QCD (and considering there are no other deductions for the ease of this example) reduces their taxable income by $5,000 plus the standard $27,700 to get a $32,700 reduction in taxable income, making the amount taxable $67,300 as opposed to $72,300 if making a cash donation with the standard deduction.
QCDs also reduce adjusted gross income, which has the added benefits of reducing or eliminating Social Security Tax and Medicare Part B premiums, which decrease in tandem with reductions in adjusted gross income.
Of course, there are rules surrounding what type of accounts are eligible for making QCDs and what type of organizations may receive them. In general, traditional IRAs, inherited IRAs and dormant SIMPLE and SEP IRAs are allowed while Roth IRAs, qualified retirement plans such as 401(k) and 403(b), and active SEP and SIMPLE IRAs are not allowed to fund QCDs.
Churches; private operating foundations for zoos, libraries, museums and the like; and educational organizations are among the list of approved recipients of QCDs. Charitable trusts and private grant making organizations are on the list of exclusions.
If you are interested in making a QCD, it is imperative to work with your CPA. If you are 70.5 years old, have a qualified account and confirm that the recipient is a qualified charity,