Five Reasons Your IRA might be the Best Source for Charitable Gifting

Getting a tax break for your charitable giving has become harder over the past handful of years.  The 2017 Tax Cuts and Jobs act eliminated a bunch of potential ‘itemized’ deductions and severely capped others.  As a result, today fewer than 20 percent of taxpayers itemize their deductions, eliminating the opportunity to deduct their charitable donations from their taxable income.

For many seniors, though, there’s another way your charitable giving can reduce your tax bill.  This is a result of a provision in the tax code called Qualified Charitable Distributions (QCDs). QCDs aren’t new – they’ve been around since 2006 – but they’re becoming much more popular. 

QCDs are simply contributions made to tax-exempt charities from an Individual Retirement Account.  The rules are simple:

• You must be age 70 ½ or older.
• You must distribute funds directly to a charity from your IRA custodian (you can’t distribute the money to yourself and then donate). To facilitate this, many IRA custodians will issue checkbooks to over-70 ½- year-old participants, allowing them to write checks directly to their favorite charities.
• The annual limit of QCDs for any person is $100,000.

This can be a great way to reduce tax liability while also supporting charitable causes. Here are five ways QCDs can lighten your tax load:

REDUCE your Adjusted Gross Income (AGI)

 One of the primary benefits of making a QCD is that the donated amount is excluded from your AGI. This can have a significant impact on your overall tax liability, as AGI is used to determine eligibility for certain deductions and credits. In some cases, less of your Social Security and fewer of your long-term capital gains may be taxed!   You might also be able to avoid surcharges on Medicare premiums by lowering your AGI through a QCD.  Reducing income might make you eligible for certain tax credits. In an extreme case, you might save enough in taxes to cover the amount of the charitable gift!

Make RMDs less ‘taxing’

In 2024, taxpayers 73 and older are required by law to begin taking minimum distributions (RMDs) annually from their traditional IRAs. These distributions are subject to income tax unless they are donated as a QCD. By using QCDs to satisfy all or part of your RMD, you can avoid paying taxes on that portion of your distribution. This allows you to fulfill your RMD requirement while also supporting charitable causes.

No need for the shoebox of Itemized Deductions

By making a QCD, you can still receive a tax benefit from your charitable donation without needing to itemize. This can be especially beneficial for retirees who may not have enough deductions to itemize but still want to support charitable organizations.

“Double-Dipping” on tax benefits

In addition to reducing your taxable income by making a QCD, you also receive the standard tax deduction, which is meant to account for otherwise itemizable things, like charitable contributions. This means that you can receive a double tax benefit for your donation – once by excluding the amount from your AGI with a QCD, and again by taking the standard deduction!

Your heirs will thank you

Savings accounts, brokerage accounts, real estate – none of these create an income tax liability to your heirs when you die.  However, your traditional IRA does.  Beneficiaries must pay income tax on any amount they inherit that hasn’t previously been taxed.  QCDs allow you to reduce the amount your heirs pay in income tax when you’re gone – and allow you to retain more of the assets that pass tax-free.

If you’re over 70 1/2 and have an IRA, QCDs should become part of your vocabulary!