Tax Planning, Financial Planning

Tax-Saving Strategies: Tax-Efficient QCDs

April 10, 2024

Tax-Saving Strategies: Tax-Efficient QCDs

(Part Three of our three-part series)

For investors 70½ years or older with IRAs, Qualified Charitable Distributions (QCDs) can be a win/win: minimizing your taxes while supporting your favorite charities. Here’s what you need to know.

What They Are

A QCD is a donation of funds from your IRA to a qualifying charity. If the donation meets the QCD requirements, it is excluded from your taxable income, up to an annual limit. Formerly capped at $100,000, the new QCD limit is $105,000, adjusted for inflation.

One catch: A QCD is excluded from your taxable income only if the funds are transferred directly from your IRA to the charity. If a distribution check is made payable to you, even if you use the money to make a charitable contribution later, the distribution will be treated as taxable income.i

QCD Advantages
QCDs have advantages over charitable deductions you make yourself and claim on Schedule A.

  • The primary advantage to making charitable donations yourself is the charitable deduction. However, if you don’t have enough deductions to itemize (married filed jointly standard deduction is $32,300 for age 65 or older), you won’t get a deduction for your donation at all.
  • In contrast, when a QCD is excluded from your taxable income, you reduce your Adjusted Gross Income (AGI), which may reduce the amount of income tax you pay, reduce your Income Related Monthly Adjustment Amount (IRMAA) to Medicare premiums, and increase eligibility for tax credits.
  • When you are in required minimum distribution status, if you make the charitable donation yourself, you still have to take your Required Minimum Distribution (RMD) (and pay taxes on it). A QCD can satisfy your RMD obligation, up to the annual limit.ii But remember the “first dollars out” rule: every distribution from the IRA is counted toward the RMD, so the QCD must be made early to get this benefit. This is a good reminder to make a habit of making QCDs early in the year.
  • If you plan on leaving your traditional IRA to your heirs (other than your spouse), they will have to pay tax on the IRA balance, generally within 10 years. So you may want to think of your traditional IRA as the account you use for charitable giving. Using your IRA to make charitable gifts during your lifetime using QCDs can help you reduce the balance of your IRA—and its corresponding RMDs and taxes.

Tracking QCDs

Don’t forget to keep track of your QCDs and report them to your tax advisor. QCDs are not deductible as charitable contributions on Schedule A, but as with tax-deductible contributions, you must get a written acknowledgement of your contribution from the charitable organization before filing your return.iii Work with your wealth manager to track your QCDs report them to your CPA.

QCD Alternatives

If you’re not old enough (70 ½) to make QCDs, ask your wealth manager about donating appreciated securities. They’ll give you double the tax benefit: neither you nor the charity will pay capital gains tax, and you can deduct the full market value (FMV), not the price you paid.

Washington Trust Wealth Management Can Help

Your wealth advisors at Washington Trust Wealth Management can tailor tax-efficient strategies to your unique financial situation and goals, utilizing planning tools to determine which strategies will yield you the highest tax benefit.

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