With end of year approaching, it may be time to evaluate your charitable giving strategies to make the most of your contributions for 2023. Americans usually give to charity for two main reasons: to support a cause or organization they care about or to leave a legacy through their support. When giving to charitable organizations, some people elect to support through cash donations. Others, however, understand that supporting an organization may generate tax benefits. They may opt to follow techniques that can maximize both the gift and the potential tax benefit.
Whether you are committed to supporting the arts, the environment, education or other causes – a tax-smart approach to year-end giving is critical if you’re looking to reduce your tax exposure and increase your philanthropic impact. A popular tax-saving strategy called qualified charitable distributions (QCD) is beneficial if you’re planning to withdraw from your IRA and looking to make charitable donations, but it will depend on your unique financial situation.
How They Work:
A QCD lets you directly transfer up to $100,000 in tax-deferred retirement savings to the qualified charity of your choice tax-free. So, instead of liquidating the assets, paying taxes and then donating the proceeds — a transaction that must be included in adjusted gross income (AGI) — you simply donate the money directly and avoid a taxable event. Your AGI determines how much you’ll pay in taxes, and it can make a significant impact for wealthier individuals. Not only does AGI determine your tax bracket, but it can also be used to limit you from other tax exemptions and may result in you paying higher Social Security premiums for Medicare Part B and Part D.
Perhaps you’re thinking you may not need a lot of income in retirement, but it’s important to remember that the IRS requires you to take minimum distributions from your retirement accounts once you reach a certain age regardless of need. These distributions are all it takes to bump up your AGI.
Requirements for QCD:
To take advantage of a QCD, one must meet the following requirements.
Individuals must be 70 ½ or older.
The selected charity must qualify for a charitable income tax deduction by an individual (not including a private foundation), a donor-advised fund or a supporting organization under Internal Revenue Section 509(a)(3).
The charity that receives the donation must provide a contribution acknowledgment. Failure to obtain the acknowledgment will invalidate the QCD.
QCD may be made from any IRA or individual retirement annuity, but not from a simplified employee pension, a simple retirement account or an inherited IRA.
The maximum annual amount that can qualify for a QCD is $100,000 per person and gift-splitting is not allowed. For example, an IRA owner couldn´t make a distribution of $200,000 from their own IRA and split that gift with his or her spouse.
If more than $100,000 is withdrawn from the IRA and contributed to a charity, there is no carryover to a future year. The amount over the $100,000 threshold is taxable income and a charitable deduction can be claimed only if the taxpayer itemizes.
QCD apply only to taxable amounts and don’t include non-deductible IRA contributions. This is an exception to the pro-rata rule, which usually applies to IRA distributions.
QCD cannot be made from IRAs receiving ongoing contributions. If you have terminated a SEP or SIMPLE IRA or are no longer making contributions, then you can make a QCD from that account.
Ready to get started?
QCD can be a highly advantageous way for a charitably minded individual to donate, but they may not be the best approach for everyone. It’s best to reach out to our team so that we can discuss this tax strategy that can benefit both you and your chosen charities the most.
A Smarter Way to Give
At DBHW Wealth Partners, it’s our privilege to help you give generously and always look to ensure you do it wisely. Even though there are income and estate tax advantages to charitable giving, we know this isn’t the main driver to philanthropic giving – but nevertheless, there are valuable benefits that shouldn’t be ignored. Some investors are comfortable with their current gifting strategies. Others may want a more advanced strategy. Our team of financial advisors can help you assess which approach may work best for you.