Avoiding Taxation With QCDs

As 2022 comes to a close and we start to do our tax planning, one mechanism that has grown popular with clients are Qualified Charitable Distributions (QCDs).  For clients who take required minimum IRA distributions, giving directly to charities may be an advantageous strategy.  The IRS allows direct distributions from retirement accounts to registered 501(c)3 institutions as a tax-free distributions.  You must be 70 ½ or older and cannot exceed amounts of $100,000 annually. 

If one is charitably inclined, and taking their required minimum distributions, they may want to withhold some of their out of pocket giving, and use their IRA to make QCDs.  As an example, if you are mandated to take $10,000 out of your IRA each year, that withdrawal is ordinarily fully taxable.  If however, you would have donated money to charity or multiple charities of $10,000 throughout the year, by withholding that donation and instead sending your required distribution to those organizations directly from your IRA, you would eliminate the taxation of that distribution. 

There are a couple of caveats to be aware of, however.  The first one being that the first dollars out of an IRA are used to satisfy your required distribution.  If you take more than the required amount and do not send those funds to charities, after the required distribution is satisfied the additional distribution cannot qualify.  The timing of your distributions are essential and you should consult with your financial and tax advisers before you do so. 

The other caveat, albeit not as important as the former, is that many financial institutions will have a limitations on the amount of the QCD.  Usually that floor is anywhere between $100-$500. Meaning, it may be difficult for you to give two hundred charities $20 each. 

Also note that a Schedule A tax deduction cannot be taken for the QCD and you cannot receive anything in return.  Roth IRAs do not qualify because distributions from Roth IRAs are generally tax free. 

For more information on this please do not hesitate to reach out to me or your financial and tax advisers. 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.