Year-end is just around the corner, but there is still time to make some tax-saving moves before 2022 comes to a close.
Taxpayers who are age 70 ½ or older can transfer up to $100,000 tax-free to a charity via a qualified charitable distribution (QCD) by the end of the tax year. Making qualified charitable contributions directly from your IRA is a way to not only reduce your tax liability but also donate to a worthy cause.
The money given to charity counts toward the donor’s required minimum distributions (RMDs) but does not increase the donor’s adjusted gross income or generate a tax bill.
Timing a QCD is essential. While most people do their giving at holiday time or before the end of the calendar year, it is best to do QCDs early in the year before any RMDs are taken. If the RMD is taken before the QCD, that RMD income cannot be offset by a QCD later in the year. Known as the “first dollars out rule,” the first dollars withdrawn from a traditional IRA in a year where an RMD is due will first go to satisfy the RMD.
For married taxpayers, each spouse can make a QCD of up to $100,000 a year, which is $200,000 total for the household. Bear in mind that each spouse must have the necessary funds to do this as one spouse’s charitable distribution cannot be made on behalf of the other spouse.
Unlike regular charitable donations, QCDs cannot be claimed as itemized deductions.
Keeping the donation out of your AGI may be important because doing so can:
- Help the donor qualify for other tax breaks (for example, a lower AGI can reduce the threshold for deducting medical expenses, which are only deductible to the extent they exceed 10 percent of AGI);
- Reduce taxes on your Social Security benefits; and
- Help you avoid a high-income surcharge for Medicare Part B and Part D premiums, (which kicks in if AGI hits certain levels).
In addition, keep in mind that charitable contributions do not yield a tax benefit for those individuals who no longer itemize their deductions. So those who are age 70½ or older and are receiving RMDs from IRAs may gain a tax advantage by making annual charitable contributions via a QCD from an IRA. This charitable contribution will reduce RMDs by a commensurate amount, and the amount of the reduction will be tax-free.
So, while QCDs are exempt from federal income taxes, other traditional IRA distributions are taxable (either wholly or partially depending on whether you have made any nondeductible contributions over the years).
If you are interested in learning how a QCD can benefit your bottom line or would like more information about how to identify organizations that can accept QCDs, please contact us today.