Charitable contributions are a meaningful way for individuals to support causes close to their hearts, while also potentially gaining some tax advantages. For those committed to philanthropic causes, it’s important to explore the tax-efficient strategies available to make the most of these contributions.
A key option for individuals over a certain age is to make charitable contributions directly from their Individual Retirement Plans or IRAs. This strategy is known as a Qualified Charitable Distribution (QCD), and it allows individuals to gift in a tax-efficient manner, while also potentially meeting their Required Minimum Distribution (RMD) requirements.
A QCD is an option available to individuals who are age 70½ or older. This provision allows IRA owners to direct up to $105,000 per year to a qualified charity directly from their IRA without counting the distribution as taxable income. This is especially beneficial for those who are taking RMDs, which are required to begin at age 73 (if you turned 72 in 2023 or later) under the current laws. Instead of recognizing income from these distributions, which could push someone into a higher tax bracket or reduce other tax benefits, the amount of the QCD is excluded from taxable income. For married couples, each spouse can make a QCD of up to $105,000 from their individual IRAs, making this an even more powerful tool for those who are charitably inclined.
It is important to understand that even if you are of RMD age, the QCD option is only available to be made from an IRA. If you are taking your RMD from a qualified retirement plan, such as a 401(k) or 403(b), the QCD is not an option. This may be one aspect to consider when you retire and are trying to decide whether to rollover your retirement account to an IRA.
The process of making a QCD is fairly straightforward. The distribution must be made directly from the IRA to the charity. This means instructing the IRA trustee to issue a check directly to the organization. This needs to be completed by December 31 in order for the QCD to be effective. It’s important to note that the charity must be a qualified 501(c)(3) organization that is eligible to receive tax-deductible contributions. Donor-advised funds and private foundations do not qualify for QCDs. Once the check is issued, the amount will not be included in your taxable income for the year, and if you are subject to RMDs, the QCD will count toward that requirement.
Another advantage of QCDs is that they can be beneficial for those who do not itemize their deductions. Given the higher standard deduction amounts in recent years, fewer individuals itemize, which means that the ability to take a charitable deduction for contributions may be lost. However, with a QCD, the tax benefit is preserved because the distribution is not included in income, regardless of whether the individual itemizes.
While the current annual limit for a QCD is $105,000 per year, excess amounts cannot be carried over to future years. For those considering making significant charitable contributions, it can be helpful to consult with a financial advisor to ensure they are maximizing the tax benefits and coordinating the timing of their donations. Additionally, if you are considering using a QCD to fulfill your charitable goals, it is important to start the process early in the year, as processing times can vary and it may take some time for the funds to be transferred.
Incorporating charitable giving into your financial plan can be both rewarding and beneficial from a tax perspective, especially when using tools like QCDs. It allows you to support the causes that matter most to you, while also meeting your financial goals in a tax-efficient way. As always, before implementing any charitable giving strategy, it’s a good idea to consult with your financial and tax advisors to ensure that it aligns with your overall financial plan and philanthropic intentions.
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This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.
