If you're a philanthropist that receives traditional IRA distributions, there’s a charitable tax advantage you should know about involving cash donations to a charity approved by the IRS.
What are qualified charitable distributions?
The most relied upon method of transferring your IRA assets to your preferred charity is through an age-restricted tax provision. If you're an IRA owner over the age of 70 and a half, you can send up to $100,000 annually of your distributions to your qualifying charitable organization. Qualified charitable distributions (QCDs) still count toward your required minimum distribution (RMD) amount but won't trigger taxes or raise your adjusted gross income (AGI).
Since your donation doesn’t increase your AGI, it will allow you to:
- Qualify you for additional tax breaks such as threshold reductions for medical expenses, which have a cap of 7.5% of your AGI.
- Circumvent Social Security's 3.5% investment income tax taxation triggered by your investment income.
- Potentially avoid Medicare Part B and D high-income surcharges on your premiums when your AGI exceeds certain levels.
- Prevent the charity receiving your QCD from needing to pay federal estate taxes and avoid state death tax liability in most cases.
Key considerations
You can't claim deductions for any QCD that isn’t included in your income. Also, remember that at 72 years of age, you must start taking your RMDs, although you can make QCDs starting at age 70 and a half.
In 2022, you have to set up direct charitable payments to your qualified charity by December 31st to benefit from a QCD. You're also allowed to use these QCDs to meet the RMD requirements for your IRA. For example, if you must take $15,000 in RMDs for 2022 and pay a QCD of $10,000, you would need to withdraw $5,000 to fulfill the remaining distribution requirement for this year.
Other rules and limits may apply. Want more information? Contact us to see whether this strategy would be beneficial in your situation.
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