Qualified Charitable Distributions for Retirees

In a nutshell, a qualified charitable distribution (QCD) is something that everyone who is older than 70 and a half can benefit from. The maximum limit for these donations is $100,000. Qualified charitable distributions for retirees have the potential to significantly impact your income tax bracket as well as allow you to avoid phaseouts of other deductions. To maximize the benefits, you normally need to work with one of the top tax relief companies. Alternatively, you may want to get as much information on these donations and do some gruntwork on your own. This article will provide you with an excellent head start.

What is a qualified charitable distribution and how does it work?

To begin to understand QCDs, we need to understand the required minimum distributions first (RMDs). If you have reached 73 years of age and have an individual retirement account (IRA), you are required to take RMDs each year, regardless of the fact whether you need the funds.

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While this may sound like free money, the issue with this is that these RMDs affect your income bracket. If this happens, you will be paying more in taxes. However, the more important thing is that you might not be aware of how these distributions affect your income bracket and make mistakes while filing your tax return, earning an IRS penalty in the process. While there are ways to deal with and avoid IRS penalties, of course, the best thing is never to have to deal with them at all. Lastly, the increased income bracket may trigger numerous deduction phaseouts, further reducing the amount of money you get each year. Luckily, there is a way to avoid the entire situation, at least to some extent.

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Not making your RMDs may lead to IRS penalties.

Enter qualified charitable distributions for retirees. By using QCDs, you can fulfill your required minimum distributions by making a direct transfer of up to $100,000 to charity. You don’t need to donate the entire amount to one charity, you may split it into as many qualifying charitable accounts as you wish.

Who is it available to?

Qualified charitable distributions for retirees are available to anyone that has reached 70 and a half years of age. If you are married to another person who is eligible to make such distributions, the limit doubles, up to $200,000. One thing to note about the distribution limit is that it applies to all of the QCDs that you take from your IRA in any given year. Furthermore, aside from traditional IRA, you can make these contributions from any IRA accounts, such as inherited, inactive SIMPLE IRAs, and inactive SEP.

Before you start making QCDs, however, you may want to consider how QCDs impact other IRA activities. For example, borrowing money from IRA may have a significant effect on QCDs, under certain circumstances. Unfortunately, there is no way of telling whether you will be affected in advance than to work with a professional tax company or to learn all of the interactions on your own. Luckily, there are good chances that you will never have to deal with any such interactions. Making QCDs is as simple as it comes, as long as you understand all the requirements and limitations.

QCD limitations

While you may be able to make a QCD that exceeds your minimum required distribution for the tax year, it is usually not advisable to do so. The reason is that the extra distribution is not carried over to the next year, unlike cash, appreciated securities donations, and donor-advised foundations. Furthermore, for a donation to be recognized as a QCD, you may not benefit from it in any manner.

chained book, phone, and a laptop
QCDs have certain limitations you might want to be aware of.

For example, purchasing a charity basketball ticket or purchasing anything from a charity auction will not count as QCD. In other words, if you are looking to boost your tax refund amount and get additional benefits through QCDs, you might want to look elsewhere. Therefore, to make sure that you are getting all the benefits from qualified charitable distributions for retirees, you will want to verify that you are not getting any benefits from the distribution (other than tax benefits, of course). Furthermore, for a donation to be recognized as a QCD, you may not benefit from it in any manner.

Types of charities that can receive qualified charitable distributions for Retirees

The U.S. tax code states that only qualified charitable organizations can benefit from QCDs. This means that it is impossible to make QCDs to private foundations, supporting organizations, and private foundations, among others. Even though these organizations might be considered to be charities, they are not recognized as such within the tax code, at least when it comes to QCDs. and that your charitable organization of choice is eligible to receive QCDs.

Therefore, if you want to benefit from making QCDs, you will need to be very careful when selecting the charity to donate them. This is something that you may want to do on your own, however, rather than counting on a tax firm. The reason is that many tax companies that offer great benefits will actually try to scam you. If you want to avoid IRS tax relief scams, it is always best to verify the information on your own. That being said, there are merits to working with tax professionals. They may provide you with excellent advice but you would do well to verify that advice before you make any final decisions.

Why make a qualified charitable distribution as a retiree?

Many retirees do not use their IRA funds as their primary source of income. Quite the opposite. The fact that our lifestyle usually demands much less money as we age means that we may end up not needing to spend our retirement savings at all. However, since the IRS requires you to take RMDs, and these withdrawals are subject to ordinary income tax, the additional income may push you over into the higher tax bracket. While going into another tax bracket might not be bothersome for some retirees, many will experience negative repercussions such as losing some of the Medicare benefits that are tied to lower income brackets. In addition, your social security payments might be lower.

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Luckily, QCDs allow you to negate most of the RMD drawbacks. If you want to protect your income from taxes, making a QCD to a charity may be your best option. By donating up to $100,000 per year in QCDs, you may be able to stop your income from reaching the next threshold. Furthermore, by donating to a charity that works toward similar goals as yourself, you may reap additional benefits. For example, a charity that shelters animals might help make your neighborhood a better place. By donating to any such charity, you are not only improving your tax situation, but you are also improving your quality of life.

sign saying "make this world better"
Donating to a charity with similar goals to your own will make the world a better place.

Lastly, QCDs do not require you to itemize your tax deductions. However, since itemizing is usually the best way to maximize your distributions (more on this soon), you may want to do so anyway. The reason why you are able to do this is that QCDs do not go into your taxable income.

How to get the most out of qualified charitable distributions for retirees

There are many strategies that taxpayers can use to maximize the effect of QCDs. Since the U.S. tax code is incredibly complex, there are numerous ways to cut your tax bills by using QCDs. Out of all those ways, two of them are of important note. If you want to make sure that you get the most out of your QCDs, you may want to:

  1. Set up a giving beyond lifetime donor-advised fund account
  2. Donate to public charities
  3. Do not itemize your deductions

There may be additional strategies depending on your circumstances. If you want to make sure that you have all the options in front of you, without resorting to spending time learning about all the intricacies, you will want to talk to tax professionals. However, most taxpayers will not need any additional benefits than what these two strategies can provide. With that in mind, let’s see what they are all about.

Setting up a giving beyond lifetime donor-advised fund account

When passing an asset to an heir, it may be possible for the IRS to treat the asset differently. For example, when you transfer real estate, brokerage accounts, or retirement accounts, the IRS changes the tax rules somewhat. The IRS may also apply inheritance tax in some states, although this is not very common. Furthermore, you can use qualified charitable distributions for retirees to fund gifts to your heirs, through charitable remainder trusts. These trusts may provide steady income to your heirs, fund a donor-advised fund account, and even enable an estate to claim an estate tax deduction! The primary benefit of these donor accounts is that any QCDs you make to them are exempt from income tax. This allows you to maximize the impact that your QCDs might have on the donor fund in question.

kids, representing one of the ways in which Qualified Charitable Distributions for Retirees can have impact
You can use your QCDs to set up charitable remainder trusts.

Donating to public charities

One of the main limitations of donating assets to your heirs directly is that you will need to pay income taxes, thereby reducing the amount of money from your distributions. However, when you donate to a public charity, the entire amount is completely income tax-free! This means that every single cent you donate to public charities is going to go toward charitable goals. 

Not itemizing your deductions is usually the best way to maximize qualified charitable distributions for Retirees

The reason why you might not want to itemize your deductions when you plan on making QCDs is the fact that QCDs do not count toward standard deduction limits. That, and the recent increase in the size of the standard deduction, of course. By itemizing, you are essentially losing out on any QCDs you make, as you cannot count them as deductions. In other words, the IRS will simply include your QCDs in your taxable income if you itemize.

However, even though itemizing deductions and QCDs do not “play” well together, there are still situations in which itemizing might be the better option.

QCDs are not always the most effective strategy

As with almost everything else, the best approach to your QCDs will depend on your particular situation. For example, if you need to make one large deduction in the current year but want to support charities over time, then QCD is not a solution. In that case, you would be much better off doing a standard charitable donation, as those roll over to the subsequent years. Another example is if you possess securities that have considerably grown in value since the time of the purchase. It is usually much more tax-effective to simply donate the securities to charity instead of making a QCD.

Finding the best strategy for your situation might not be the easiest thing in the world. Therefore, you may want to involve tax professionals. By working with a CPA or a financial advisor, you will be able to figure out your goals for charitable donations and minimize your tax liability. Since there are many strategies that you can explore, professional assistance may be invaluable.

Overall, qualified charitable distributions for retirees can make a lot of sense if your RMDs are pushing you into the next bracket. You can utilize QCDs to set up a charitable fund that can benefit your heirs, or help fund a charity that has similar goals as your own. The most important benefit that differentiates QCDs from other charitable donations is that they do not have an impact on your taxable income.

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