Tax advantages of qualified charitable distributions
by Chad VanDyken, CPA, CFP®
ARTICLE | January 25, 2024
An individual retirement account (IRA) is a powerful retirement saving tool. But once you reach age 73, you must begin taking distributions, which are not only taxed as ordinary income but may push you into a higher tax bracket.
A qualified charitable distribution (QCD) is an excellent way to avoid this problem. QCDs are distributions from an IRA made directly to a qualified charity. The distribution is not included in your taxable income and can be an important tool to take maximum advantage of your benefits while supporting the causes you care about.
What is a qualified charitable distribution?
A qualified charitable distribution is a withdrawal from an Individual Retirement Account (IRA) that is given directly to a qualified charity. Qualified charities do no include private foundations, donor-advised funds or supporting organizations. Before making a distribution, check with the charity to ensure they are qualified to accept a QCD.
In addition, the contribution must be made directly from the IRA to the charity; it cannot be withdrawn and deposited in a personal account for any amount of time.
The distribution must be made after the IRA owner reaches age 70½, and the amount cannot exceed $105,000 per year (with the potential to be adjusted up each year with inflation). It’s worth noting that QCDs can be made before you’re required to take an required minimum distribution (RMD).
What are the tax advantages of a QCD?
Charitable distributions from an IRA can provide taxpayers with several tax advantages. One of the major advantages is that it is an above-the-line deduction that can help reduce your adjusted gross income (AGI). You don’t pay income taxes on the distribution, and the AGI reduction can help you qualify for other valuable tax breaks.
For example, if your AGI is below a certain threshold, you may be eligible for a reduced tax rate on long-term capital gains. It can also lower the threshold for deducting medical expenses (which are only deductible if they exceed 7.5% of your AGI).
Additionally, a lower AGI can help you avoid the Medicare Part B and D premium surcharge imposed on high-income taxpayers. Moreover, QCDs remove assets from one’s estate, making them an attractive option for taxpayers concerned about leaving a taxable estate to their heirs.
Overall, the tax advantages of a qualified charitable distribution can be significant, making it worth considering for taxpayers looking for ways to minimize their tax liability.
How Larson Gross can help
This article is intended to provide a brief overview of qualified charitable distributions and is not a substitute for speaking with one of our expert advisors. If you’d like to learn more about minimizing your taxes with qualified charitable distributions, please contact our office.
Call us at (360) 734-4280 or fill out the form below and we'll contact you to discuss your specific situation.
Chad VanDyken, CPA, CFP®
Chad VanDyken joined Larson Gross in 2015. He holds a degree from the University of Hawaii at Manoa, where he double majored in Accounting and Finance with a focus on personal financial planning.
In addition to being a CPA, Chad is a Certified Financial Planner (CFP) and has the opportunity to help individuals navigate their personal financial planning and estate tax needs.