A Qualified Charitable Distribution (QCD) is a planning tool that can help reduce the taxable amount of withdrawals for certain IRA owners. QCDs are considered a direct transfer of funds from your IRA, payable to a qualified charity. While this sounds simple enough, you must meet certain requirements before QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year. Check out our recent blog to better understand RMDs.
Below are the requirements to qualify for a QCD:
- You must be 70½ or older to make a QCD.
- QCDs are limited to the amount that would otherwise be taxed as ordinary income. This excludes non-deductible contributions.
- The maximum annual amount that can qualify for a QCD is $100,000. This applies to the sum of QCDs made to one or more charities in a calendar year. If you’re married, and file jointly, your spouse could also make a QCD for up to $100,000.
- For a QCD to count towards your current year’s RMD, the funds must come out of your IRA by your RMD deadline, generally December 31.
- Contributing to an IRA may result in a reduction of the QCD amount you can deduct. (The aggregate amount of deductible IRA contributions you make to your IRA after you turn 70 1/2 will reduce the amount of the QCD that is not includible in your gross income).
- The charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions.
It’s important to note, QCDs don’t require that you itemize, which due to the recent tax law changes, means you may decide to take advantage of the higher standard deduction, but still use a QCD for charitable giving.
Traditionally, charitable contributions are below-the-line deductions, meaning you must itemize to take advantage of the tax deduction. You either utilize the standard deduction, or itemized deductions, depending on which amount is greater. The recent increase in the standard deduction has made charitable giving less attractive from a tax savings perspective as you’re not going to receive a tax deduction unless it’s greater than the standard deduction, which for 2021 is $25,100 for a married couple filing jointly.
In addition to the benefits of giving to charity, a QCD excludes the amount donated from taxable income. In most cases, when you make a distribution from your IRA, that amount will be counted towards your taxable income. Keeping your taxable income lower may reduce the impact to certain tax credits and deductions, including Social Security and Medicare.
It’s important to consult with your tax or financial professional prior to implementing any tax strategies (such as QCDs) to ensure it’s the right fit for your unique situation.
Ben Webster, CFP® and Derek Prusa, CFA, CFP®
Co-Founders and Owners of Aspire Wealth
The American Rescue Plan
