By Charles R. Kennedy, CPA, MBA
Vice President & Director of Tax Services

It’s rare that a tax strategy can help you save taxes and support a charitable cause at the same time, but the Qualified Charitable Distribution (QCD) does just that. A QCD enables you to make a contribution to an IRS-approved charitable organization directly from your traditional IRA.

There are many potential tax benefits of QCDs, depending on your situation, including lowering the federal taxes and any state taxes you would owe on your IRA distributions. When required minimum distributions (RMDs) are diverted to charitable organizations through QCDs they are not applied to your adjusted gross income.

Qualified charitable distributions

To make a QCD, IRA owners who are age 70½ or older may direct up to $100,000 per year of their IRA distributions to charity. The money given to charity counts toward your required minimum distributions but doesn’t increase your adjusted gross income (AGI) or generate a tax bill.

Keeping the donation out of your AGI may be important for several reasons, including:

• It can help you qualify for other tax breaks. For example, having a lower AGI can reduce the threshold for deducting medical expenses, which are only deductible to the extent they exceed 7.5% of AGI.
• You can avoid rules that can cause some or all of your Social Security benefits to be taxed and some or all of your investment income to be hit with the 3.8% net investment income tax.
• It can help you avoid a high-income surcharge for Medicare Part B and Part D premiums, which kick in if AGI is over certain levels.
• The distributions going to the charity won’t be subject to federal estate tax and generally won’t be subject to state estate taxes.

Important points

You can’t claim a charitable contribution deduction for a QCD not included in your income. Also keep in mind that the age after which you must begin taking RMDs is 72, but the age you can begin making QCDs is 70½.

To benefit from a QCD for 2022, you must arrange for a distribution to be paid directly from the IRA to a qualified charity by December 31, 2022. (You may not take the distribution and then donate it to charity yourself to qualify for the QCD.)

You can use QCDs to satisfy all or part of the amount of your RMDs from your IRA. For example, if your 2022 RMDs are $10,000, and you make a $5,000 QCD for 2022, you have to withdraw another $5,000 to satisfy your 2022 RMDs.

Other rules and limits may apply.

If you would like to discuss whether a QCD would be beneficial in your situation, contact your G.T. Reilly advisor.