Qualified Charitable Deduction delivers tax benefits beyond the typical income tax deduction.
For anyone facing the prospect of taking the required minimum distribution (RMD) from their Individual Retirement Account (IRA) the potential for added tax burden is real. The amount of the RMD an individual is required to take can increase income resulting in a higher income tax bracket, triggering phaseouts of tax deductions like the personal exemption and itemized deductions, or even triggering higher taxes on Social Security income.
But with Qualified Charitable Deductions (QCD), there’s a way to mitigate the potential for a higher tax burden. By making a distribution directly from an IRA to the charitable organization, individuals are able to fulfill the RMD requirement without adding to their income – which is great for both federal and state tax purposes.
It’s also a great way to support your goals for charitable giving with a different tool – benefitting charities and nonprofits who are sorely in need of philanthropy to continue their missions.
Think beyond the charitable deduction
With a QCD, the individual does not receive a traditional tax deduction. Individuals are able to make QCDs of up to $100,000 to a qualified charity. Married couples can make a direct transfer of up to $100,000 each, for a potential total of $200,000. This will be adjusted to inflation beginning in 2024.
That per person limit applies to all QCDs from all IRAs in a year – taken as either one large contribution or several smaller ones. And they can be used to support multiple charities, again as long as the total per individual doesn’t exceed $100,000 for the year.
In addition, QCDs can reduce the IRA balance along with required RMDs in future years. And because they are not counted toward deductibles for itemized giving on taxes, a QCD can enable a donor to give a bigger charitable gift than just donating cash or other assets.
SECURE Act 2.0 brings changes
Just about any public charity qualifies to receive QCDs. Although exclusions include donor-advised fund sponsors, private foundations and supporting organizations. QCDs can also not be used to make purchases in a charity auction or tickets for a charity event.
However, with the SECURE Act 2.0 that goes into effect in 2024, it is expanded to include charitable remainder trusts (CRT) or charitable gift annuities. Just as you’d expect, these come with limitations. For example, you can make only one QCD to a charitable remainder trust (CRT) or charitable gift annuity (CGA) in your lifetime for an amount up to $50,000. It must be solely funded with the QCD and all distributions must go back to the individual that funded the account or their spouse, and will be taxed as ordinary income.
Other qualifying details
Unlike other RMD provisions, the age threshold for QCDs begins at age 70 ½ and has not increased to age 72, 73 or 75 as others have. Qualified charitable distributions are made directly to the eligible charity from eligible IRAs and inherited IRAs, as well as inactive SEPs and SIMPLE IRAs (no longer receiving employer contributions) – without passing through the hands of the IRA holder.
More than feeling good about giving
QCDs can help to provide tax benefits to individuals and couples that have been lost or minimized with increases to the standard deduction and other changes to the tax code. It’s certainly worth a conversation with an attorney from Vandenack Weaver Truhlsen.
To learn more, please contact our office or use the contact form and we will reach out at a time that’s convenient for you.
VWT Contributors: Mary Vandenack, Michael Weaver
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