Understanding Qualified Charitable Distributions

For taxpayers who are 70.5 or older (or approaching this age), qualified charitable distributions (QCDs) can be an excellent strategy for contributing to charitable causes while taking advantage of some tax benefits in the process.

At the same time, QCDs can be somewhat of a complex topic, with many taxpayers afraid to use this strategy for fear of making a mistake.

Fortunately, with just a bit of knowledge and guidance, seniors can take full advantage of QCDs as a means of enhancing their charitable giving while potentially minimizing their taxable income in the process.

What Are Qualified Charitable Distributions?

According to the IRS, qualified charitable distributions “offer eligible older Americans a great way to easily give to charity before the end of the year” by allowing them to transfer up to $100,000 to charity tax-free each year. The IRS also reminds taxpayers that “for those who are at least 73 years old, QCDs count toward the IRA owner's required minimum distribution (RMD) for the end of the year.”

In other words, QCDs allow individuals 70.5 or older to make tax-free contributions directly from their individual retirement accounts (IRAs) to charities, provided that they meet certain eligibility requirements.

This opportunity gives taxpayers the ability to use a strategic approach to charitable giving while providing them with tax benefits in the process.

Benefits of Qualified Charitable Distributions

For seniors over the age of 70.5, taking advantage of QCDs can be beneficial in a number of ways. First and foremost, QCDs give taxpayers the ability to contribute to charities and causes they believe in. This can be done by making contributions directly to qualified charities, of which there are many listed in a public database.

This, in turn, can significantly lower taxable income for taxpayers who will not otherwise need to use the money. Specifically, taxpayers can make up to $105,000 in charitable contributions through QCDs each year with no tax liability. At the same time, these contributions can lower one's taxable income for the year—which can reduce the total amount they owe in taxes.

Furthermore, for those age 73 or older who are required to start taking required minimum distributions (RMDs) on their retirement accounts, using QCDs to make charitable contributions can count towards these RMDs. In other words, taxpayers do not need to start drawing on their retirement accounts if they make QCDs in the appropriate amount. Meanwhile, taxpayers can preserve more of their retirement funds to use in the future.

Special Considerations for Qualified Charitable Distributions

For those who are thinking about using QCDs as part of their tax strategies, there are some special considerations worth keeping in mind. First, taxpayers should be aware that the annual limit for QCDs has increased to $105,000 for 2024 (it was $100,000 in previous tax years). By 2025, inflation adjustments will likely increase the amount further to $108,000. Keep in mind, too, that this is the amount for individual taxpayers; married couples can make a combined donation of up to $210,000 per year, provided that the distributions come evenly from each individual's IRA.

Taxpayers should also be aware of important reporting and documentation requirements when it comes to QCDs. Specifically, QCDs need to be reported on the tax return for the year the charitable distribution is made. For formal reporting purposes, IRA trustees are required to issue a 1099-R form for all distributions made, which should include QCDs. Likewise, a formal acknowledgment from the charity that received the donation is also required to be filed with the IRS.

Finally, taxpayers should keep in mind that distributions need to be made directly to eligible charitable organizations from an IRA in order to qualify for tax benefits. There cannot be any exchange of goods or services from the charity or organization.

Getting Help from a Professional

There's a lot to remember when it comes to using qualified charitable distributions as a means of contributing to charitable causes while potentially lowering tax burdens in the process. Ultimately, taxpayers considering using QCDs are encouraged to consult with an experienced and knowledgeable tax planner before moving forward with a contribution.

This way, they can check to ensure that they are eligible and that they handle their tax returns and all required documentation accordingly. From there, they can prepare and file their returns with confidence.

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