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Your Giving Tuesday Tax Strategy: Using Qualified Charitable Distributions Thumbnail

Your Giving Tuesday Tax Strategy: Using Qualified Charitable Distributions

Financial Planning Insights Tax Planning

Giving Tuesday falls on Tuesday, November 29. This annual celebration, created in 2012 to encourage people and communities to do good, takes place every year on the Tuesday following Thanksgiving. In the spirit of this day and the beginning of giving season, we wanted to highlight a tax-planning strategy that not only supports qualified charities, but can also be used to satisfy your required minimum distribution (RMD) from your IRA. (If you are age 72 or older, the IRS requires that you take a required minimum distribution each year from your tax-deferred retirement accounts.)

Qualified Charitable Distribution (“QCD”) is a withdrawal from an IRA that is made directly to an eligible charity. IRA distributions are reported as taxable income, while a QCD is excluded from your taxable income.  

QCD Rules & Planning Pointers

  • You must be at least 70 ½ years old to make a QCD. If you make a distribution prior to turning 70 ½, the distribution will be treated as taxable income.
  • Funds must be transferred directly from your IRA custodian to the qualified charity. A check payable to the charity could be mailed directly from the custodian, or you can mail the check to the charity yourself. The key is that the check must be payable to the charity.  
  • The maximum annual amount qualifying for a QCD is $100,000 per taxpayer.
  • QCDs cannot be made from a 401(k) or from active SEP or SIMPLE Plans.
  • Donor-advised funds and private foundations are not eligible to receive QCDs.
  • You must obtain a contemporaneous written acknowledgment from the charity stating the amount contributed, and it must also state that there was nothing received in return for the donation.
  • You cannot take a charitable deduction for the QCD since the QCD amount is excluded from income, which is better than a tax deduction.
  • If you mail the QCD check yourself, be sure it is received with enough time to be cashed before year-end, especially if you are using this to satisfy your RMD.
  • Tax reporting forms will show the distribution as taxable. You will need to tell your tax preparer the amount of the distribution that was a QCD so that it can be reported accurately on your return.

QCD Timing & Tax Strategies

You should structure your QCDs as the first distributions to come out of your IRA since the first dollars out go towards satisfying your RMD. You should also proceed with caution when making deductible IRA contributions and QCDs; the combination may reduce the tax benefit of the QCD.

With the tax law changes made in the Tax Cuts and Jobs Act of 2018, many taxpayers are no longer itemizing their deductions. Using a QCD allows you to give to a charity and realize a tax benefit for that donation even if you take the standard deduction ($26,000 for Married filers in 2022). In addition, the QCD reduces your AGI (adjusted gross income) and taxable income which may reduce or eliminate the taxation of social security, allow for certain income dependent deductions and credits, and/or reduce Medicare premium surcharges.

If you are charitably inclined and have an RMD this year or later, you may wish to utilize the QCD strategy. You should consult with your financial advisor and/or tax advisor to learn more about the rules and to see if this strategy would be appropriate for your situation.