What is a Qualified Charitable Distribution (QCD)?
A Qualified Charitable Distribution is a tax planning tool that includes a charitable donation from an Individual Retirement Account (IRA). QCDs are limited to $100,000 and can only be made from IRAs with an owner at least 70½ years old.
How do QCDs Work?
By donating all or a portion of your Required Minimum Distribution (RMD) directly to a charity, the distribution is not included in your income and is not part of your Adjusted Gross Income (AGI), but does satisfy your RMD requirement for the year. For example, if your RMD for 2022 is $60,000, and you make a $60,000 Qualified Charitable Distribution, none of the distribution will be taxable income to you but your RMD will be satisfied for the year. If instead of a $60,000 QCD, you made a $40,000 QCD and took the remainder of your RMD as a normal distribution, you would pay income tax on the $20,000 of the RMD that was distributed to you.
Additional Considerations for the Use of QCDs
- QCDs are not allowed from qualified retirement plans or from ongoing SEP IRAs or ongoing SIMPLE IRAs. SEP and SIMPLE IRAs are treated as “ongoing” if it is maintained under an employer arrangement under which an employer contribution is made for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made.
- IRA distributions follow the first-dollar-out rule. This means that if you take a distribution from your IRA in excess of the RMD amount for the year, only the first dollars up to the RMD are considered as satisfying the RMD. Because of this rule, it is a good practice to make a Qualified Charitable Distribution prior to taking the remainder of your RMD if you intend on taking any excess distribution.
- Since the Qualified Charitable Distribution is not included in income and is not part of AGI, a QCD is considered an “above the line” deduction. Reducing a taxpayer’s AGI is important as AGI is used to calculate various things, such as Medicare premiums.
- The Tax Cuts and Jobs Act of 2017 doubled the standard deduction, which means fewer individuals are itemizing their deductions. By donating to charities through a QCD, taxpayers have an opportunity to fulfill their charitable goals while maximizing their tax savings.
Tax planning is an important part of Schultz Financial Groups’ ongoing work with our clients. Contact us to schedule an appointment to learn more about working with SFG.
Editors’ note: This article was originally published in August of 2019. It has been updated to reflect 2022 information.