Benefits of Qualified Charitable Distributions (QCD)

Benefits of Qualified Charitable Distributions (QCD)

| July 28, 2022

Charitable contributions are no longer deductible if you take the standard deduction.  But if you’re age 70 ½ or older, and you like to give to charities, there’s a way you can give to a qualified charity and cut your taxes - by using what is called a Qualified Charitable Distribution. To do this, you must be at least age 70 ½, and the gift must be distributed from your IRA to the charity.

A QCD, allows you to give up to $100,000 a year, from your IRA, directly to a qualified charity without taxes. And if you’re married, you can both give up to $100,000 each from your own IRA - for a total of $200,000.

And if you are 72 and charitable minded, a QCD will allow you to take your required minimum distribution out of your IRA tax-free.  It's a way to get the equivalent of a charitable deduction, even though you're not itemizing. Remember if you don’t itemize, you can’t normally deduct your charitable giving.

 To illustrate, if a married couple is age 72 or older, the standard deduction for them would be $28,700 in 2022. 

 So, let's say they're also giving $6,000 to their church and they have a required minimum distribution of $10,000. 

 If they take the 6,000 out of their IRA as part of their required minimum distribution amount, they could take it as a "qualified charitable distribution" and it would come out of the IRA tax-free, where otherwise it would be taxable. 

 What this means is you just increased your overall deduction from $28,700 from the standard deduction to an additional $6,000 from the QCD, for the equivalent of a $34,700 deduction.  This is huge!

 The benefit of a QCD is that it’s NOT taxed as income to you or to the charity, and it doesn’t increase your AGI – this is important!

Contrast this to taking a normal, taxable distribution from your IRA, giving it to a charity, and then deducting the gift from your tax return. When you take a normal distribution from your IRA, it’s ALL taxable income, and is reported on your tax return.

This increases your AGI - which in turn can cause a ripple effect on your other taxes and deductions. When your AGI goes up, it can cause you to pay more taxes on your social security, can cause Medicare part B premiums to increase, and even cause itemized deductions to be phased out. It also raises the floor on the medical deduction. Conversely, QCDs are not included in your adjusted gross income (AGI) and so it avoids these problems by not increasing your AGI. This lowers the odds that you’ll be affected by unfavorable AGI-based rules.

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