The Qualified Charitable Distribution (QCD) allows taxpayers over age 70½ to exclude up to $100,000 from their gross income for gifts given directly to qualified charities from their IRA. A QCD can be used to satisfy all or a portion of the IRA holder’s required distribution for that calendar year.
Alas, the QCD has caused substantial confusion for two reasons: 1) The benefits of a QCD are widely misunderstood, and 2) until recently, the availability of the strategy waxed and waned with the political and calendar season. Now however, the QCD is a permanent fixture so planning with it is much simpler.
Regarding the first point, many people wrongly believe that a QCD provides a tax deduction in addition to allowing them to make charitable gifts with pre-tax dollars. In fact, there is no charitable deduction allowed for a QCD. However, dollars given to charity directly from an IRA are not reported as income.
Now that we truly know that the QCD is here to stay, we can ask, “Which is more valuable, no income and no deduction or income with a deduction?” For most taxpayers, there truly is no difference between the two. Here is a short list of people for whom the QCD has value:
Taxpayers who have already given more than the maximum that can be deducted in a calendar year, but would like to give even more. These individuals would be pleased to funnel some of their required IRA draw to charity without having to report the additional income.
Taxpayers whose gross income is low enough that there is a possibility that some or all of their Social Security benefit will be tax free if they can avoid reporting their required draw on their IRA as “income” due to making a QCD instead.
Taxpayers whose incomes are high enough that the cost of Medicare Parts B and D could ratchet up if their gross income exceeds certain thresholds. (over $170,000 for married filing jointly)
Taxpayers whose incomes are high enough that their dividends and capital gains could be subject to additional taxes that apply above certain thresholds. (over $250,000 for married filing jointly)
Taxpayers whose incomes are high enough that they begin to lose the benefit of some personal exemptions and itemized deductions. (over $309,000 for married filing jointly)
For retired clients who need us to manufacture regular cash flow, there are many more moving parts to consider when choosing the perfect “charitable currency” versus “personal currency.” For some, appreciated stock may be the best charitable currency and, for others, the QCD might be preferable. Call us and we will help you sort through the options!
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.