QCD: A Little-known Tax Strategy for IRA Donations
A Qualified Charitable Distribution (“QCD”) is a tax-smart gifting opportunity for well-off retirees who have more retirement funds than needed to meet their income needs. The ability to donate on a pre-tax basis to qualified charities—whether or not you itemize deductions—makes IRAs that are subject to a Required Minimum Distribution a great source of legacy funds.
A QCD allows you to give up to $100,000 tax-free each year directly to a qualified charity from your traditional IRA after you turn age 70 ½.
Any QCD counts towards satisfying your IRA Required Minimum Distribution (“RMD”) for the year in which you make your gift. You can donate part of your RMD to charity and withdraw the balance as retirement income or you can give more than your calculated RMD each year—up to an annual limit of $100,000—and completely avoid paying income tax on these monies.
To qualify for the tax break and make your charitable gift with pre-tax dollars, any QCD distribution must be transferred directly from your IRA to a qualified charitable institution. Note that you cannot receive anything of value as a result of your donation. For example, you cannot get tickets to a charitable event in return for your QDC gift.
Are you a good candidate to make a Qualified Charitable Distribution?
If you can afford to donate IRA monies to a favored charity, then you could benefit tax-wise if you meet one or more of the following situations:
- Many retirees take the standard deduction when calculating their income tax liability because they don’t generate enough deductible expenses or income to make itemizing worthwhile. As a result, they could be losing out on the tax advantages of deducting their charitable donations. Using the tax-free IRA QCD provision as a way to make charitable contributions would allow you to obtain a tax benefit from your contribution regardless of whether you itemize or take the standard deduction.
- Monies donated through a QCD count both towards your IRA RMD and as a charitable gift. While your QCD gift will not be listed as a deduction on Schedule A of your tax return, any QCD amount that satisfies your IRA RMD will reduce your Adjusted Gross Income (“AGI”) for the tax year in which your donation is made. A lower AGI could potentially reduce your income tax bracket and lower the odds that you will be affected by various unfavorable AGI-based tax rules—such as those that cause you to pay more for Medicare, subject your investment income to an additional 3.8% Medicare surcharge, or result in lower tax-deductibility of rental expenses.
- When individuals have made non-deductible contributions to their traditional IRAs, the taxability of RMDs are calculated proportionately from taxable and non-taxable funds. In the case of a QCD, a preferential rule treats QCD gifts as coming first from taxable funds, thus increasing the tax benefit of donor gifting.
Should you have further questions, please contact:
Erin Schreiner, Executive Director
P.O. Box 1537 Lenox Hill Station,
New York, NY 10021
BSA Tax ID 13-1632509
The Bibliographical Society of America does not provide tax or legal advice. This document is for educational purposes only, has been prepared without regard to the individual financial circumstances and objectives of persons who receive it, and does not provide individually tailored advice. The appropriateness of a specific strategy will depend on an individual’s circumstances and objectives.
Tax laws are complex and subject to change. Individuals should consult with their personal tax advisor regarding any potential tax and related consequences of investments made using an Individual Retirement Account and with their attorney for matters involving estate planning.