Qualified charitable distributions (QCDs) from Traditional IRAs to qualified charities were first allowed in 2006, but it was a bi-annual question as-to whether Congress would allow the transaction for another two years. The PATH Act of 2015 eliminated these concerns by permanently adding QCDs effective in 2016. That permanent addition, coupled with a higher standard deduction, has made QCD a much more commonly used tax-planning method nationally.
With a QCD, up to $105,000 (2024 limit) of an IRA’s potentially taxable income may be contributed to a qualifying charity by an individual who has reached age 70½. The QCD is not reported in income, and no charitable deduction is claimed. This can be advantageous, especially for filers who take the standard deduction, in which case they are not receiving a tax benefit for the charitable contributions they are making. In addition, lower adjustable gross income (AGI) can also affect things like tax brackets, Medicare premiums, tax on Social Security benefits, tax on capital gains, among other taxes or limitations on deductions.
At LIS, we see people using this technique for a variety of reasons – but the most common are below:
- Meet the RMD requirement without increasing tax – many of our clients are age 73 or older and own a traditional IRA. That means they are required to take a certain percentage out of their IRA each year. In some cases, they do not need those funds to live on or taking the distribution would move them into a higher tax bracket or create other issues, so we can utilize a QCD to get those monies directly to the charities of their choosing without tax implication!
- Give to church (or other charity) in a tax-efficient way – It is important to note that money in a Traditional IRA is pre-tax. Someday, either you or your heirs will pay tax on that money. The only way to avoid that is to give it away to a charity. For those of you who are charitably inclined anyway, it can make great sense to use your pre-tax money for giving, rather than your other funds that you have already paid tax on (i.e. your checking account).
- Make a one-time, larger gift to a charity – often times people want to leave a lump sum to their favorite charity or church upon their passing via their will. This is a wonderful thing to do – regardless of tax incentives! In addition to this – or in place of that gift – we often talk with our clients about giving the gift now so that the charity can receive it sooner, you can see the impact of your generous gift, and it makes your estate plan much cleaner as well! A QCD is a great way to gift a lump sum (up to $105,000 per year) out of your IRA to charity without creating a tax liability for you or the organization of your choosing!
These are just a few examples of the ways we help people plan and manage their investments and taxes in retirement. Our goal is always to educate and empower you to do make the best decisions you can for your financial future. If a QCD is a planning topic you would like to learn more about – please call or text us at 641-628-1021 or email us at info@leightonis.com!