Qualified Charitable Distributions (QCDs) are one possible option for donating from an IRA directly to a charitable organization.
The option is open to anyone who is 70½ years old or older and has funded an IRA.
QCDs allow you, the donor, to make charitable contributions while satisfying your required minimum distribution. You do not need to pay income tax on the distribution, either. So you can make the charitable donations you want to make while satisfying your RMD.
This opens up a few unique opportunities that enable you to give your money charitably while meeting your obligations to the IRS. But there are rules surrounding how you do so.
In this article, we will go over how Qualified Charitable Distributions can be used in 2023 for maximum advantage.
What qualifies as a qualified charitable distribution?
To fulfill the “Qualified” part of Qualified Charitable Distribution, there are a few rules to remember.
First, you must be aged at least 70½ at the time of the distribution for it to qualify. Otherwise, it won’t qualify and you may trigger penalties and taxes.
Next, the recipient must be an eligible charity. The distribution is made directly by an IRA’s custodian to a qualified charitable organization. The main criteria for that is that the organization receiving the distribution must be recognized as 501(c)(3) by the IRS.
You don’t want to make a mistake here.
Many organizations may claim to be charities or may seem like a charity without meeting the IRS criteria. In fact, some charities may not qualify. The only way to be sure is to contact a tax advisor.
Some private foundations, supporting organizations, donor-advised funds, or even some others that generally fit the definition of a “charity” organization won’t qualify.
Next, you cannot exceed the limit of $100,000 per year. If you are married and filing jointly, the total correspondingly doubles to $200,000.
Does a QCD reduce taxable income?
Yes.
A Qualified Charitable Distribution can reduce your taxable income by a set amount. This is a large part of why people choose to make one.
When you make a distribution, you are effectively reducing your taxable income.
For example, if you’re in the tax bracket of 22% ($44,725 to $95,375 for the 2022 tax year), imagine you make a Qualified Charitable Distribution of $10,000. If your income is in the dead center of that tax range, your tax obligation is reduced by $2,200.
Of course, this transaction must meet all of the rules for what qualifies as a QCD. The transfer must be made by the IRA custodian directly to the qualifying organization.
If you simply withdraw funds from your IRA and THEN send them to the organization, you will still be subject to the regular tax rules. Make sure the transaction is conducted properly!
Will QCD be allowed in 2023?
Yes, Qualified Charitable Distributions will be allowed in 2023. There are no signs that it will be done away with anytime soon.
Compared to many IRS deductions and other rules, the QCD rules have been relatively consistent. However, there will likely be a few changes in 2023 and beyond. These are a result of the Secure Act 2.0.
First, the limit of $100,000 will be indexed for inflation. The details are mentioned in Section 307.
Second, the minimum age will be increased to 73 as of January 1st, 2033.
Lastly, there is now a one-time election for a split-interest entity. A split-interest entity QCD qualifies for an exclusion from income tax treatment that normally applies to other QCDs. However, there are a couple of requirements:
- The amount does not exceed $50,000
- The IRA owner does not have an election in effect to make a QCD into a split-interest entity for any preceding tax year
What are the alternatives to a QCD?
There is no exact copy of a Qualified Charitable Distribution. But there are some similar choices to make, from a purely financial standpoint.
You can donate appreciated assets instead of cash. Such assets can include real estate, stocks, and other traditional assets. By donating them directly, you can avoid capital gains on the appreciated value while receiving a tax deduction for the asset’s fair market value.
Other popular alternatives include:
- Charitable gift annuities
- Charitable remainder trusts
- Donor-advised funds
If you’re unsure about whether significant Qualified Charitable Distributions are right for you, consult an advisor about them and the above options.
Conclusions: What are QCD tax advantages?
Donating to charities while reducing your tax obligations is the name of the game.
Your distributions are excluded from your taxable income, helping you avoid some regular tax obligations. If your distribution meets the qualifications we’ve gone over in this article, you’re good to go!
Of course, a QCD is an important decision with implications for the charity of your choice as well as for your own financial accounts. The math of the tax advantages varies according to income and other circumstances.
So, it’s best to think it through thoroughly and/or consult a tax advisor before making a big decision.
