Increasing Impact - Reducing Taxes

In the realm of philanthropy and tax planning, qualified charitable distributions (QCDs) offer a unique opportunity for individuals to make a difference in areas they care about while also reaping financial benefits themselves. By understanding the advantages of QCDs, individuals with certain goals can create a win-win between themselves and the organizations they care about.

What is a QCD?

A qualified charitable distribution (QCD) is a tax-free donation of up to $105,000 from a Traditional IRA to a qualified charity each year instead of taking a Required Minimum Distribution. The amount is indexed for inflation under the SECURE 2.0 Act rules. QCDs are available to IRA owners who are at least 70 1/2 years old and can be made even if the account holder isn't subject to required minimum distributions (RMDs) yet.

Who are ideal candidates for a QCD (could be some or all factors below)?

• Those with charitable intent. From time to time, we will find while working with clients over age 70 1/2 that they are giving significant amounts to charity from their cash flow or bank accounts every year. For these people that are charitably inclined, using the QCD rather than their cash allows them to get money that would otherwise be taxable out of their IRA, while at the same time preserve more of their non-IRA or cash funds, or more of their cash flow. Neither the client nor the charity pays tax on the IRA distributions made under QCD, and the client ends up retaining more of their money.

• Those subject to Required Minimum Distribution (RMD) rules (generally those 73 and older) with significant IRAs that they aren’t using for their lifestyle. These clients are required to take RMD from the IRA each year and pay the tax on the distribution. Typically, these clients will then just shift the after-tax funds to non-IRA accounts, but making the distribution under QCD allows the tax to be avoided altogether.

• Those who have significant taxable income in retirement already and who would like to manage their income tax bracket.

• Those who would like to see the impact of their contributions during their lifetime rather than after death. Plenty of clients make charitable intentions part of their estate plans but giving under QCD during life allow the client to see the impact of their giving on the organization(s) they care about.

• Those who don’t necessarily have as a priority maintaining a certain value for inheritances for children.

How do I process a QCD?

Your financial institution will need certain information to process the QCD – the name of the charity, the address, etc. Most qualifying charities are prepared to provide these directions if you ask for them, and you can then forward to your financial institution. Importantly, the distribution must go directly to the charity, it cannot get distributed to you and then given in order to qualify as a QCD.

Other considerations

The QCD should get processed prior to taking any RMDs for the year. The QCD is typically reported on form 1099-R and will NOT indicate it is a non-reportable transaction. You must notify your tax advisor of the QCD. QCDs must be completed in the calendar year, not the tax year, and must come from pre-tax funds. A tax deduction cannot be taken in addition to taking QCD. Please consult your tax advisor for specifics on using QCD in your situation prior to initiating a QCD strategy.