Tax Benefits of Making a QCD
At the end of 2015, Congress permanently extended the rule allowing taxpayers to exclude from taxable income certain individual retirement account (IRA) distributions made directly to a qualified charity. Otherwise known as qualified charitable distributions, or QCDs, such transfers can provide individuals who were already planning to make a charitable gift with several tax benefits.
How It Works
To use the QCD strategy, you must:
- Be 70½ or older.
- Transfer no more than $100,000 per year.
- Transfer from an IRA and not an employer-sponsored retirement account.1
- Have the funds directly transferred from the IRA to a qualified charity. Generally, a qualified charity is one that is authorized to receive tax-deductible contributions.
If all requirements are met, the QCD will count toward satisfying your required minimum distribution (RMD) obligation for the year. This is where the more subtle tax benefits of the contribution come into play. If you were to follow the typical procedure — withdrawing the RMD and then writing a check to the charity — the RMD amount would have to be included in your adjusted gross income (AGI) and then claimed as a charitable contribution deduction.
By taking the RMD as a QCD — that is, transferring the RMD, or a portion of it, directly to the charity — the QCD is never included in AGI. Therefore, it is effectively deducted whether or not you itemize your deductions, which may benefit you if you claim the standard deduction. Also, by reducing your AGI, you may reduce the taxable portion of your Social Security benefits, as well as income-related adjustments to Medicare Part B and D premiums.
This communication is not intended to be tax or legal advice and should not be treated as such. Each individual’s situation is different. You should contact your tax and/or legal professional to discuss your personal situation.
1QCDs may be made from SEP-IRAs and SIMPLE IRAs that are not considered “ongoing” under IRS rules.
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