Charitable giving is an important goal for many individuals and families. As people age and their wealth evolves so too should the manner in which they give. While cash and appreciated securities are the two most popular methods of giving available to everyone regardless of age, the option of giving via qualified charitable donations (QCDs) is oftentimes the most beneficial way for retirees to give.
The ability to make QCDs has been around since the Pension Protection Act was enacted in 2006 but was not made a permanent part of the tax code until further legislation in 2016. Given their temporary status, coupled with an age threshold before people could utilize them, many are not as familiar with QCDs as they are with other forms of giving.
In order to make an eligible QCD, several requirements must be met:
The donor must have reached age 70½ prior to the date the donation is made. Donating a day early will negate QCD status.
The receiving charity must be a qualified 501 (c)(3) organization as described by the IRS.
Funds must be sent directly from the donor’s IRA to the qualified charity. No funds can run through the donor’s hands, i.e. the check from the IRA custodian should be addressed to the charity. Donor-advised funds (DAFs), private foundations, and supporting organizations are not qualified charities for QCD purposes.
Each taxpayer is limited to $105,000 per year (2024 limit) in aggregate QCDs.
The benefits of QCDs are numerous:
QCDs are not taxable. Compare that to an ordinary withdrawal from an IRA, which is 100% taxable as ordinary income, assuming no after-tax contributions have been made to one’s IRA. Since the QCD is not taxable to you, the donation to charity is also not tax-deductible. As a result, one’s taxable income is not impacted by a QCD. It is almost like the transaction does not exist. More on this later.
Since QCDs are not considered income, they do not impact your adjusted gross income (AGI). AGI is what drives a taxpayer’s exposure to the 3.8% net investment income tax, IRMAA upcharges on Medicare Part B premiums, and the potential deductibility of medical expenses.
QCDs count towards a taxpayer’s required minimum distribution (RMD). For some, it is possible to fully satisfy an RMD and not pay a penny in income tax.
Making QCDs before RMDs kick in (currently age 73) helps reduce the balance of the IRA and thus the size of future RMDs.
Given the many benefits that QCDs provide, be aware of the reporting requirements to ensure that you get the value of them when your return is filed. QCDs, along with all other distributions from an IRA, are reported each year on Form 1099-R. There is no box on that form that breaks out QCDs from other distributions, so you will want to keep good records and inform your tax preparer of QCDs made in the current tax year so that only non-QCD distributions are reflected in taxable income for the year. As with all donations, make sure that the charitable organizations know that you are sending funds and that they acknowledge your donation in written form. You will want this documentation in the event of an audit.
While the QCD option is likely the best path for most taxpayers, there may be circumstances that dictate a different approach to charitable giving for some. There are also potential “wrinkles” that could arise, complicating the QCD landscape. Consult with your tax advisor if you are not sure.
As always, if you have any questions, please contact us.
Insights
Giving in Your Golden Years
Charitable giving is an important goal for many individuals and families. As people age and their wealth evolves so too should the manner in which they give. While cash and appreciated securities are the two most popular methods of giving available to everyone regardless of age, the option of giving via qualified charitable donations (QCDs) is oftentimes the most beneficial way for retirees to give.
The ability to make QCDs has been around since the Pension Protection Act was enacted in 2006 but was not made a permanent part of the tax code until further legislation in 2016. Given their temporary status, coupled with an age threshold before people could utilize them, many are not as familiar with QCDs as they are with other forms of giving.
In order to make an eligible QCD, several requirements must be met:
The benefits of QCDs are numerous:
Given the many benefits that QCDs provide, be aware of the reporting requirements to ensure that you get the value of them when your return is filed. QCDs, along with all other distributions from an IRA, are reported each year on Form 1099-R. There is no box on that form that breaks out QCDs from other distributions, so you will want to keep good records and inform your tax preparer of QCDs made in the current tax year so that only non-QCD distributions are reflected in taxable income for the year. As with all donations, make sure that the charitable organizations know that you are sending funds and that they acknowledge your donation in written form. You will want this documentation in the event of an audit.
While the QCD option is likely the best path for most taxpayers, there may be circumstances that dictate a different approach to charitable giving for some. There are also potential “wrinkles” that could arise, complicating the QCD landscape. Consult with your tax advisor if you are not sure.
As always, if you have any questions, please contact us.