Understanding Qualified Charitable Distributions (QCDs)

Qualified Charitable Distribution (“QCD”) is a financial strategy that can potentially offer significant benefits to holders of Individual Retirement Accounts (“IRAs”) who are over the age of 70.5. Unlike other distributions, which are taxed at ordinary income tax rates, QCD allows for a tax-free distribution from the IRA, provided that the distribution goes directly to a qualified charity.
To be eligible for a QCD, several rules must be followed. Firstly, the taxpayer must be at least age 70.5 at the time of the distribution, and the distribution must be from an IRA account.
Secondly, the charity receiving the distribution must be a qualified charity. Donor Advised Funds or private foundations do not qualify for this purpose. Lastly, QCDs cannot exceed $100,000 per taxpayer, per year. However, per the Secure Act 2.0, starting in 2024, this figure is indexed to inflation.
Once you reach the eligible age, there are some mechanics to consider before you start making Qualified Charitable Distributions. The funds must be sent directly from the IRA to the charity. A distribution to you that you then send to a charity will not count as a QCD.
It’s important to note that IRA custodians do not report QCDs as tax-free withdrawals. These transactions will show up as taxable distributions on the Form 1099-R that the custodian will prepare. It will be up to your tax preparer to mark the QCDs as tax-free.
In some cases, it might be beneficial to explore getting a dedicated checkbook from your IRA custodian for this purpose. This would allow you to make direct donations from the IRA. However, special care must be taken to avoid accidentally writing checks for other purposes from the IRA. Additionally, the charitable contributions arising out of QCDs should not be captured as an itemized deduction on Schedule A of the tax return, as doing so would represent double-counting.
So, why might QCDs be better than itemized charitable donations? There are several potential reasons. In some cases, a QCD may lower taxable Social Security. It may allow more of one’s itemized medical expenses to be deducted. It could lower the income used to calculate Medicare Part B and D premiums. QCDs count toward your required minimum distributions and may lower one’s Modified Adjusted Gross Income, which impacts eligibility for a number of credits and the Net Investment Income Tax.
Lastly, the standard deduction is high enough that even with charitable contributions, not all taxpayers will claim itemized deductions.
As you plan your personal giving throughout the year, keep these points in mind.
Being prepared and understanding the benefits of QCDs can help you make the most of your charitable contributions while also reaping potential tax benefits.
Important Disclosure:
Mike Bergen is a Partner, Managing Director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. Beacon Pointe Advisors does not offer legal or tax advice. Please consult with the appropriate tax or legal professional regarding your circumstances. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.