Tax Insights | April 27, 2022 Show
Making Qualified Charitable Distributions (QCDs) and Naming Charitable Beneficiaries Caleb Lund, CAP® Hayden Adams, CFP® Download a PDF of this article A traditional IRA offers a tax-advantaged way to save money over many years and have an income stream in retirement. Charitably-minded owners of traditional IRAs may be pleased to know that their accounts can also be used in two ways to maximize charitable impact and minimize taxes. The first way is making Qualified Charitable Distributions (QCDs), and the second way is naming charitable beneficiaries. 1. Give to charity during retirement years through a QCD.Retirement-age individuals and couples may find that they don't need income from their traditional IRAs in certain years or all years. Their other sources of income may be sufficient. Some may not want the IRA income because these withdrawals are subject to ordinary income tax, and more taxable income may push these IRA owners into a higher tax bracket. In particular, a higher tax bracket can have adverse impacts on Social Security payments and Medicare benefits. Regardless, starting at age 72 the IRS mandates traditional IRA owners take annual income withdrawals, known as Required Minimum Distributions (RMDs). Failure to take these withdrawals could subject IRA owners to stiff penalties. Thankfully, charitably-minded individuals and couples age 70½ and older have a tax-smart strategy available with traditional IRAs: the QCD, also known as a charitable IRA rollover. The QCD allows a donor to instruct a traditional IRA1 administrator to send up to $100,000 per year—all or part of the annual RMD—to an operating charity.2 And couples who submit tax returns with married filing jointly status each qualify for an annual QCD of up to $100,000. The IRA assets go directly to charity, so donors don't report the QCD as taxable income and don't owe any taxes on the QCD. In addition, the assets can be put to good use by a donor's favorite operating charity,2 making QCDs a win-win strategy. Some donors may also find that the QCD provides greater tax savings than cash donations for which charitable tax deductions are claimed. This is because Adjusted Gross Income (AGI) is reduced, as shown in the case study below, and AGI is used in several key calculations, such as determining the taxable portion of Social Security benefits or what deductions and credits donors qualify for receiving. In addition, a QCD allows a donor to receive a tax benefit from a charitable contribution even if the donor does not itemize deductions. This is the result of the QCD being excluded from taxable income. Case study: enhancing tax savings with a QCD gift Bob will submit tax returns with the single filing status and have ordinary income of $80,000 in 2022. Bob is 75 years old in 2022 and needs to take a RMD from his traditional IRA. In this instance, Bob's IRA is valued at $1,050,000, resulting in a projected RMD of $42,683 ($1,050,000 divided by the IRS mandated age 75 distribution period amount of 24.6). The below illustration compares a cash gift of $42,683 with a QCD gift for $42,683. QCD FAQs
2. Set up giving beyond lifetime by naming a donor-advised fund account or other public charity as a charitable beneficiary.Not all assets owned (e.g., real estate, brokerage accounts, and retirement accounts) are treated the same when passed to heirs. In fact, a unique feature of traditional IRAs is that heirs pay income taxes on the inherited assets at their own income tax rate at the time of withdrawal. This unique tax feature is why public charities can be ideal beneficiaries of traditional IRAs. Public charities—including donor-advised funds—do not pay income tax on IRA income, which means every penny of the donation can be directed to support the donor's charitable goals. What's more, donors can ask their advisors about using IRA assets to fund gifts, such as charitable remainder trusts, that provide income to heirs. For example, charitable remainder trusts may:
Naming a charitable beneficiary is easy to do and may result in substantial tax savings for a donor's heirs and estate. What donors can do nextSchwab Charitable has tools, information, and other resources available online to inform and guide donors throughout their philanthropic journey. Donors seeking resources related to this article may:
Donors contemplating any of the strategies in this article should consult with their financial, tax and legal advisors. For questions or assistance with philanthropic planning or charitable giving, donors and their advisors may:
What is a qualified contribution for tax purposes?Generally speaking, a qualified charitable distribution (QCD) is: A nontaxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) that is owned by an individual who is age 70½ or over. The QCD is paid directly by the trustee of the IRA to an organization eligible to receive tax-deductible contributions.
What is considered a qualified charitable donation?Use QCDs to manage your required minimum distributions from an IRA. A qualified charitable distribution (QCD) allows individuals who are 70½ years old or older to donate up to $100,000 total to one or more charities directly from a taxable IRA instead of taking their required minimum distributions.
How much can you write off for donations 2022?Annual income tax deduction limits for gifts to public charities, including donor-advised funds, are 30% of adjusted gross income (AGI) for contributions of non-cash assets, if held more than one year, and 60% of AGI for contributions of cash.
How do I claim QCD on my taxes?To report a qualified charitable distribution on your Form 1040 tax return, you generally report the full amount of the charitable distribution on the line for IRA distributions. On the line for the taxable amount, enter zero if the full amount was a qualified charitable distribution. Enter "QCD" next to this line.
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