WHAT IS A QUALIFIED CHARITABLE DISTRIBUTION (QCD)?

Typically, distributions from traditional IRAs are taxed as ordinary income, but what if you could avoid those taxes?

That is where Qualified Charitable Distributions (QCD) comes in. A QCD allows you to take a distribution from your traditional IRA and exclude it from your taxable income, meaning you owe no tax on the distribution.

A QCD can also be used to satisfy all or a portion of your Required Minimum Distribution (RMD), which would allow you to avoid tax on the RMD. Sound great! Right? But, there are some rules that need to be followed . . .

Please note: a QCD can only be made from a Traditional or Rollover IRA. You cannot do a QCD from a 401(k), 403(b), 457 etc.

THE RULES: HOW TO COMPLETE A QCD

1. You must be at least 70 ½ or older to take advantage of doing a QCD.

2. The money must go directly from the IRA to the charitable organization.
The money cannot pass through the IRA holder, otherwise, the distribution becomes a taxable event. Most financial institutions (i.e. Fidelity, TD Ameritrade, Charles Schwab, Vanguard, etc.) have forms specifically created for facilitating the completion of a QCD.

3. The maximum QCD allowable on an annual basis is $100,000.

4. Donations cannot be directed toward Donor Advised Funds, Supporting Organizations, or Private Foundations.

5. At the end of the year, you’ll receive a 1099 tax notice for your IRA. The QCD will automatically be included with all other taxable distributions as code 7 in box 7 on the form. You will need to inform your tax preparer what portion of your IRA distributions were done as a QCD.

WHY SHOULD I CONSIDER A QCD?

A QCD is most appropriate if you make charitable donations and only take the standard deduction on your tax return as it restores your ability to take advantage of the tax savings charitable diving provides. Even if you itemize, a QCD may still make sense. For example, if your RMD bumps you into a higher tax bracket, which may also make more of your Social Security taxable, a QCD can help mitigate that. As always, before deciding whether a QCD is right for you, please talk with your qualified tax advisor or financial advisor.

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When it comes to philanthropy and giving back to those in need, there are countless ways to make a difference. One popular option that has gained traction in recent years is the Qualified Charitable Donation (QCD). This charitable giving strategy allows individuals who are 70 ½ years of age or older to donate funds directly from their Individual retirement account (IRA) to a qualified charity without counting the distribution as taxable income.

This tax-efficient strategy was established under the Protecting Americans from Tax Hikes (PATH) Act of 2015, and has since gained traction as a valuable tool for those looking to support charitable causes while reducing their tax burden. By making a QCD, individuals can lower their taxable income and potentially reduce their tax bill, all while supporting causes near and dear to their hearts.

One of the key advantages of a QCD is that the distribution is not counted as taxable income, which can be a significant benefit for those who are subject to Required Minimum Distributions (RMDs) from their IRA. By donating funds directly to a charity through a QCD, individuals can meet their RMD requirement without increasing their taxable income.

Another benefit of making a QCD is that it allows individuals to support the causes and charities they care about most. Whether it’s a local nonprofit, a religious organization, or a charitable foundation, donors can choose where their funds go and make a meaningful impact on their community.

In order to make a QCD, individuals must meet certain requirements, including being at least 70 ½ years of age and making the donation directly from their IRA to a qualified charity. The donation must also be made in cash, and cannot exceed $100,000 per year. It’s important to consult with a financial advisor or tax professional before making a QCD to ensure that all requirements are met and that the donation is processed correctly.

Overall, Qualified Charitable Donations are a valuable tool for individuals looking to support charitable causes while maximizing their tax benefits. By making a QCD, donors can reduce their taxable income, meet their RMD requirement, and make a meaningful impact on the causes they care about most. Consider exploring this charitable giving strategy as a way to give back and make a difference in your community.