QCD Year End Tax Strategies Expanded
For taxpayers who stress over annual Required Minimum Distributions and are also inclined to charitable giving, Qualified Charitable Distributions or QCD’s have been a useful tool to accommodate both relief over federal income tax angst and the desire to
donate. QCD’s can use the federal tax code to benefit taxpayers, mostly in the upper income brackets, who are older and must take Required Minimum Distributions (RMD’s). Recent changes in federal law under the SECURE Act 2.0 may expand the usage of this tool somewhat. Here is how the system works.
- Required Minimum Distributions. Required Minimum Distributions for affected seniors can become the bane of their existence since taxpayers above the given age must withdraw specified amounts based on their age from their traditional retirement accounts and pay taxes. The governmental purpose is obvious. Traditional IRA’s (and rollover IRA’s and so on) give a deferred tax benefit. If taxpayers were permitted to continue the deferral indefinitely the government would never recover on the tax deferral. QCD’s help to soften the blow of additional year end taxes by providing some certain specified relief through donations to qualified charities. In the right case, they serve two purposes, one being to save some taxes that otherwise would be due and the other to benefit a favored qualified charity. Charities can include churches and other 501(c) 3 entities under the federal tax code. Before using this strategy taxpayers need to confirm that the organization or entity to which they are donating qualifies before making the gift.
- QCD’s – The Process. If you are interested in learning more your first step would be to contact your IRA’s custodian (where your IRA is held) and indicate you are interested in making a QCD. Some custodians provide step by step information to get started on line which you can then follow up directly with their representative. Schwab, as one example, through Schwab Charitable, has published online an interesting article that compares and contrasts the results of giving through a Qualified Charitable Distribution vs. a regular charitable donation. The QCD route in the example provided can reduce taxes substantially since the distribution does not appear in the taxpayer’s adjusted gross income at all and goes directly to the charity. See “Two tax-smart strategies for charitable giving with an IRA,” https://www.schwabcharitable.org/resource/charitable- giving-with-ira
- How RMD’s usually work. Taking your RMD adds funds to your taxable income which can have the unwelcome effect of potentially pushing you into a higher income tax bracket. It might also limit or eliminate some types of tax deductions such as personal exemption and itemized deductions and sometimes trigger higher taxes on Social Security income. So whether you want or need to take the distribution from the account, you are required to take it and count it in your income. There is a substantial penalty otherwise. The QCD works differently since, because the QCD distribution is not counted in your income at all it is not intended to push you into a higher tax bracket or reduce those exemptions, itemized deductions and so on. See the Schwab article above.
- How QCD’s work. A qualified charitable distribution allows individuals who are required to take RMD’s to donate up to $100,000 total to one or more qualified charities directly from a taxable IRA without the funds being counted as part of their income. You must, however, follow the rules so be careful and never attempt to do this on your own.
- What has changed. A side by side detailed comparison of 2023 changes can be found at “Traditional and Roth IRA Changes Under Secure 2.0,” https://www.groom.com/resources/traditional-and-roth-ira-changes-under-secure-2-0/ Generally speaking, the Required Minimum Distribution age has been further increased from the prior 70 ½ and then 72 to age 73 but the $100,000 limit for the QCD is now going to be indexed for inflation. For the first time individuals will be allowed to make a one-time election of up to $50,000 inflation indexed for QCD’s to certain entities including charitable remainder annuity trusts, charitable remainder unitrusts and charitable gift annuities.
- When do you need to complete the QCD? It must be completed by December 31 of the tax year in question – so soon.
- What kind of charitable contributions count? Not all charitable contributions necessarily count. QCD’s cannot be made to donor-advised funds, private foundations and supporting organizations, though these are categorized as charities.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.