TAX PLANNING | 08/29/2024
If you’re required to take required minimum distributions (RMDs) from a traditional IRA and also have charitable giving goals, a qualified charitable distribution (QCD) can be a powerful tax-saving strategy. By leveraging this approach, you can fulfill your philanthropic intentions while reducing your taxable income and potentially qualifying for additional tax benefits.
How a QCD Works
A QCD allows individuals aged 70½ or older to donate directly from their IRA to an IRS-approved charity. For 2024, you can direct up to $105,000 per person ($210,000 for married couples filing jointly) of your IRA distributions to charity.
The benefits of this strategy include:
- Counts Toward RMDs: The donation satisfies RMD requirements.
- Avoids Increasing AGI: The amount donated does not increase your adjusted gross income (AGI) and is not taxable.
Key Tax Advantages
Avoiding an increase in your AGI can offer several additional benefits:
- Lower Federal and State Taxes
Without a QCD, RMD withdrawals are taxed at rates of up to 37% federally in 2024, with potential state income tax liabilities. A QCD bypasses these taxes. - Qualify for Other Tax Breaks
A lower AGI can reduce thresholds for certain deductions, such as medical expenses, which are deductible only when exceeding 7.5% of AGI. - Reduce Tax on Social Security and Investment Income
Lowering your AGI can help you avoid taxes on Social Security benefits and the 3.8% net investment income tax on certain income. - Avoid Medicare Premium Surcharges
High-income surcharges for Medicare Part B and Part D premiums are tied to AGI. A lower AGI can help avoid these additional costs.
Important Rules to Consider
- Age Requirements: You can begin making QCDs at age 70½, even though the age for starting RMDs is now 73.
- Direct Transfer: The donation must be paid directly from your IRA to the qualified charity by December 31 of the tax year.
- No Double Dipping: You cannot claim a charitable contribution deduction for a QCD that is excluded from your income.
- Partial RMD Satisfaction: A QCD can cover all or part of your RMDs. For example, if your 2024 RMD is $20,000 and you make a $10,000 QCD, only $10,000 of additional withdrawals will be needed to satisfy your RMD requirements.
Is a QCD Right for You?
While QCDs offer significant benefits, they may not be suitable for everyone. Other rules and limits may apply based on your specific financial situation.
How We Can Help
Our tax professionals specialize in strategies like QCDs that maximize tax efficiency while aligning with your financial and charitable goals. We can help you:
- Determine whether a QCD is the right strategy for your circumstances.
- Ensure compliance with all rules and deadlines.
- Develop a personalized plan to optimize your RMDs and charitable giving.
Contact us today to explore how a QCD could benefit your tax situation and charitable planning.