Are you over age 70 ½?
Do you have Required Minimum Distributions (RMDs) where you don’t need the money for everyday expenses?
Do you have charitable interests? Recall many charitable contributions may be tax deductible.
If not applicable to you, do you know someone these questions may apply?
The first question asks age 70 ½ … but wait … aren’t RMDs required at and after age 73 now? *
Yes, RMDs are REQUIRED (as the name states), at a later age. However, the Qualified Charitable Deduction (QCD) age remains age 70 ½. So why start early? Because, 1) by removing money from your taxable IRA you are reducing the taxable balance for later RMDs (at any age), and 2) you can avoid taxation on that IRA withdrawal by contributing the withdrawal DIRECTLY to charity.
So what does this charitable contribution and deduction have to do with RMDs? That’s what makes them “qualified.” When you do have RMDs, a QCD “qualifies” as your RMD too (in addition to reducing taxable income before or after RMD age). Before RMD, you reduce taxable income without having to itemize. After RMD, the withdrawal for the QCD meets your RMD requirement too. Oh, and you don’t have to donate ALL or your RMD to charity. You can take some of the RMD as income (taxable) and donate the other part to charity under the QCD rules (not taxed). The QCD is not limited to your RMD when you have those … you can do more than the RMD in any year to reduce future RMDs too (reduces the balance subject to future RMDs).
HOWEVER, YOU MUST DO THIS CORRECTLY IN ORDER TO GET THE TAX-FREE CONTRIBUTION DEDUCTION!
PLUS, THERE IS NOTHING THAT CONNECTS YOUR DEDUCTION WITH YOUR TAX FORMS UNTIL AND UNLESS YOU ALSO INFORM YOUR TAX PREPARER SO THAT THEY FILE THE CONTRIBUTION DEDUCTION PROPERLY!
Rather than go through the hoops in detail, these below articles walk you through the steps more effectively than I can here, and include as well as how to verify that the charity you have in mind QUALIFIES for the deduction in the first place (yes, you could make a charitable contribution only to find out is does NOT qualify!).
From the horse’s mouth, the IRS: https://www.irs.gov/newsroom/reminder-to-ira-owners-age-70-and-a-half-or-over-qualified-charitable-distributions-are-great-options-for-making-tax-free-gifts-to-charity
What a QCD is, how they work, and the pros and cons: https://www.investopedia.com/qualified-charitable-distribution-qcd-5409491 “While a QCD is a withdrawal from your IRA, it is not counted as taxable income on your tax return like regular withdrawals are. Instead, a QCD can be deducted from your gross income on your tax return—without having to itemize your deductions. This both lowers your income and means that you can take the standard deduction instead of itemizing if you prefer.” Lowering your income may also reduce Medicare IRMAA premiums too.
A deeper dive into QCDs including the requirement the charity MUST receive the donation by 31 December (not what many people think is by the time they file their tax return that is the date to claim a contribution to the IRA): https://www.kitces.com/blog/qualified-charitable-distribution-qcd-from-ira-to-satisfy-rmd-rules-and-requirements/
“How To Do A Qualified Charitable Distribution (QCD)
To complete a qualified charitable distribution (QCD) from an IRA to a charity, the IRA owner must:
- Already be age 70 ½ on the date of distribution
- Submit a distribution form to the IRA custodian, requesting that the check be made payable directly to the charity
- Ensure that no tax withholding [by the trustee on your behalf] is being done from the QCD to the charity (as the money must actually go to the charity to qualify, and as a non-taxable distribution no withholding should be necessary) [there’s no taxable income so there’s no tax to be withheld].
- Send the check directly to the charity, or to the IRA owner to be forwarded along to the charity
While the process of completing a QCD to a charity is fairly straightforward, the key administrative requirement is that the distribution check must be made payable directly to the charitable entity. If the funds go to the IRA owner [check is payable to the owner] and are then passed along to the charity, it is still a taxable distribution to the IRA owner and not a QCD.
Under IRS Notice 2007-7, Q&A-41, it is permitted for the check to be mailed to the IRA owner, as long as the check is payable to the charity, but a check payable to the IRA owner that is merely endorsed over to the charity does not satisfy the QCD requirements.”
What charities qualify? How to be sure (in the tools and resources section): https://www.fidelitycharitable.org/guidance/research-charities.html
Note that a QCD is not the same as a Donor Advised Fund (DAF) which have different rules.
So, if you don’t need money that you’ve saved over the years in your IRAs, you are over 70 ½, or have RMDs that you are taxed on and again, it’s income you don’t need (so why pay tax on it?), or alternatively simply have a charitable nature in the first place with your income, a QCD may be the thing for you to both make charitable contributions and reduce your taxes.
*Nope … Age 72 got changed to Age 73 (birthyears 1951 to 1959) and then Age 75 (birthyears 1960+) by what is called the SECURE ACT 2.0 (part of the Consolidated Appropriations Act of 2023). Those who have already started their RMDs continue taking them.
Photo by Julia M Cameron: https://www.pexels.com/photo/a-cardboard-with-inscription-6994982/