Want to give from the heart and reduce your taxes? Look into QCDs
By Mark Yatros
Imagine how good it would feel to lower your tax liability while helping to fund your favorite nonprofit. If you’re at least 70½ and have an individual retirement arrangement (IRA), you can do just that with a qualified charitable distribution (QCD).
QCDs are a unique way to donate money to charity by allowing you to donate directly from your IRA to a nonprofit. This is different from giving money to charity the way we normally do. With a QCD, you can give up to $100,000 a year, and it won't count as taxable income, which helps you save on taxes.
Who qualifies for QCDs?
To qualify for a QCD, you need to be at least 70½ years old. Beginning in 2024, you’re able to exclude up to $105,000 from your gross income (up from $100,00 in 2023). If you’re married, your spouse is at least 70½, and they have an IRA, they can also exclude up to $105,000 a year.
You can use QCDs with traditional IRAs and inherited IRAs. Please note that QCDs count toward the amount that you're required to take out from your IRA each year once you turn 73 (i.e., the required minimum distribution or RMD). However, your QCD can’t exceed your RMD.
Benefits of using QCDs for charitable giving
One of the biggest benefits of a QCD is the tax break. Since the money you give isn't counted as taxable income, it can help you pay less in taxes. It's different from regular charitable donations, where you only get a tax break if you itemize your deductions.
Using a QCD can also help you financially in other ways. For example, it can keep your adjusted gross income (AGI) lower, which can mean lower Medicare costs and less tax on your Social Security benefits.
How to make a QCD
Normally, IRA distributions are taxable when you receive them. But, with QCDs, distributions are tax-free if they are paid directly from the IRA to an eligible nonprofit. Notice the bold, italic words “paid directly from the IRA” because if you take possession of the distribution, even for a second, it will no longer be tax-free.
Be sure to work with your IRA administrator to make the QCD so you don’t fall into the trap of receiving the money first. Also, you must keep all records from your QCD, such as the acknowledgment letter from the charity, as proof of the donation for the IRS.
Making sure the nonprofit is qualified for QCDs
When picking a charity for your QCD, make sure it's a qualified charity. To become a qualified nonprofit, the organization must be a 501(c)(3) and eligible to receive tax-deductible contributions. You can verify the nonprofit's status by asking them and double-checking on the IRS website.
Common misconceptions and pitfalls of QCDs
There are a few things people often get wrong about QCDs. For example, as mentioned above, not all charities qualify for QCDs. Also, as the donor, you can't receive any benefit in return for your contribution, such as gala tickets or promotional items.
In addition, QCDs can’t be used to fund donor-advised funds or private foundations because they have different tax implications.
Consider getting guidance from a financial advisor
QCDs are a great way to help charities and save on taxes, but it can get confusing. If you’d like to donate through a QCD so you can keep your income lower for tax purposes and meet your RMD, it’s a good idea to speak to a financial advisor first.
My team and I are happy to meet you for a free consultation. Please get in touch with us here or call (269) 218-2100.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Allegiant Wealth Strategies offers securities and advisory services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Allegiant Wealth Strategies has offices in Battle Creek and Portage, Michigan, from which we serve Calhoun County, Kalamazoo County, and Kent County (Grand Rapids). The Allegiant Wealth Strategies team offers no-obligation financial planning consultations; call 269-218-2100 or contact us here.