Qualified Charitable Distributions (QCDs) can be a tax-efficient strategy for making IRA distributions.
Individuals who own traditional IRAs benefit from deferred taxes on these funds.
Although they provide a beneficial tax break at the time of contribution, the government still wants to have a cut of these funds.
How does the federal government ensure this happens?
The IRS mandates required minimum distributions (RMDs) from the accounts after the owners reach a certain age.
Although the age at which these withdrawals must be made starts at 72 for those born before 1951, it has been delayed until 73 for those born later.
Required minimum distributions are considered ordinary income and can move retirees into a higher tax bracket and impact their Medicare premiums.
Yikes!
Okay, now that I have your attention, stay on the sled.
There is plenty of time to do something about that for your 2025 tax planning.
With qualified charitable distributions (QCDs), retirees can minimize their tax liability while supporting others.
Retirees can benefit others and themselves through the use of qualified charitable distributions.
A qualified charitable distribution occurs when funds are transferred directly from a traditional IRA to a qualified 501(c)(3) charity.
Although QCDs are counted toward your annual RMD, they are not included in your taxable income up to a specific limit.
What is the limit?
In 2025, the limit for this exclusion from taxable income is $108,000 per person per year.
Why are these funds not included in the retiree's adjusted gross income?
Great question.
The funds move directly to the charity without entering the retiree's bank account.
Because of their exclusion from adjusted gross income calculations, qualified charitable distributions do not impact taxes on Social Security or Medicare premiums.
QCDs can also benefit those who take the standard tax deduction rather than itemizing.
In addition to tax benefits, qualified charitable distributions benefit estate planning.
Because you can lower your IRA balance through charitable giving, you can reduce the value of your estate.
Having a lower estate value can reduce the impact of federal estate taxes and can lessen inheritance tax burdens for heirs.
IRAs are not simple assets to inherit and can create tax issues for beneficiaries.
With a few exceptions, beneficiaries of inherited IRAs must withdraw all funds within ten years.
By making QCDs, you have greater control over taxes and the use of the funds.
Additionally, supporting charities can leave a lasting legacy aligned with your values to generations, whether your focus is on education, religion, health, or other causes.
Before making qualified charitable distributions, you must be at least 70½.
The gift from the IRA must be made directly to the charity.
You cannot simply have a check written to you and then endorse it to the charity.
That is a no-no.
Instead, you must instruct the custodian of your IRA to issue a direct payment to the charity.
When you make a qualified minimum distribution, it is prudent to inform the charitable organization of your gift so you can receive written acknowledgement for your records.
Because not all charities qualify as public charities under the IRS rules, you must confirm the organization's status before initiating any transfers.
Donor-advised funds, private foundations, and supporting organizations typically fail to qualify.
To document the transaction, you will need a receipt from the charity and a Form 1099-R issued by the custodian.
Even though the distribution will not appear as taxable income on your tax return, it should still be included.
Although qualified charitable distributions are pretty simple, any significant financial action should be coordinated with your retirement income strategy and estate planning.
Working with financial advisors and an estate planning attorney can help align your tax, inheritance, and charitable goals.
Professional guidance can empower you to use QCDs in combination with charitable trusts, Roth conversions, or other estate planning tools to promote your values and protect your assets.
Because QCDs are made to qualified charities directly from your IRA and count toward your RMD, you can reduce your adjusted gross income and avoid moving into a higher tax bracket.
Because these distributions can be made while alive, qualified charitable distributions can help bring your taxable estate under the exemption threshold and reduce tax burdens for heirs.
These charitable distributions can benefit those who utilize the standard tax deduction.
Although the distributions have benefits, they must be executed properly by being made directly to a qualified charity.
By working with professional advisors, your QCDs can be made to align with a broader financial, estate, and charitable plan.
This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.
Reference: Charles Schwab (Dec. 13, 2024) "Reducing RMDs With QCDs"
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