Year-End Tax Planning – Qualified Charitable Distributions (QCDs)
As the 2023 tax year winds down, we are reminding owners of individual retirement accounts (IRAs), age 70 ½ or over, that they may want to consider combining the 2023 tax benefits of charitable giving with a qualified charitable distribution (QCD) from their IRA.
These transfers, known as qualified charitable distributions or QCDs, are tax-free withdrawals from an Individual Retirement Account (IRA) made directly to a qualifying charity. QCDs are a popular way to do good while also satisfying the IRA holder’s required minimum distribution (RMD).
Single Taxpayer
If a taxpayer is at least 70 ½ years of age, they can make an IRA distribution of up to $100,000 to a qualified charitable organization and the distributed amount is excluded from gross income for federal income tax purposes. In addition, the distribution counts towards the required minimum distribution amount for the tax year.
Distributions from a traditional IRA are usually taxed at ordinary federal income tax rates. Currently, the rates max out at 37%. Sometimes the distributions could result in net investment income tax (NIIT) complications. Depending on certain restrictions, taxpayers, who do not need the money, will often make the decision to postpone distributions for as long as possible.
Married Couple
For a married couple who each have an IRA, if both spouses are age 70 ½ or over when the distribution is made, each spouse can exclude up to $100,000 for a total of $200,000.
Additional Benefits
While donating to a charity has many benefits, there are additional benefits to the taxpayer. Making a donation to a QCD excludes the amount donated from taxable income. This is not like a regular withdrawal from an IRA. Keep in mind that lowering your taxable income could reduce the impact to certain tax credits and deductions, including Social Security and Medicare.
Requirements for being eligible to make a QCD:
- Age: You must be 70½ or older.
- Limitations: QCDs are limited to the amount that would otherwise be taxed as ordinary income. This excludes non-deductible contributions.
- Maximum: The maximum annual amount that can qualify for a QCD is $100,000.00 (Indexed starting in 2024). This applies to the sum of QCDs made to one or more charities in a calendar year.
- Date: For a QCD to count towards your current year’s RMD, the funds must come out of your IRA by your RMD deadline, generally December 31.
Qualified Charities
The charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions. Some charities may not qualify for QCDs, consult a tax advisor or the charity for clarification.
Reporting
In early 2024, taxpayers who make a 2023 QCD will receive a Form 1099-R reporting both regular IRA distributions and QCDs. The total amount of distributions are reported on Form 1040, line 4a. The QCD portion is then excluded and any portion taxable is reported on line 4b.
Any taxpayers contemplating a QCD should contact their IRA trustee soon so there is sufficient time to complete the distribution prior to year-end.
If you have questions about tax planning or other accounting, tax or advisory services, please call 215.675.8364 or email us to speak with a CPA today.
DISCLAIMER: The WM Update, WM Wednesday Wisdom, WM Daily Update, and other related communications are intended to provide general information, as of the date of this communication, and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.
Additional information may be found on the IRS website, click here to read more.