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Navigating Qualified Charitable Distributions: Doing Good the Right Way

Navigating Qualified Charitable Distributions: Doing Good the Right Way

February 08, 2024

In the realm of charitable giving, making a positive impact on causes you care about while optimizing your financial strategy is a win-win.

One avenue that offers both philanthropic fulfillment and potential tax advantages is qualified charitable distributions (QCDs). However, navigating the landscape of QCDs requires a nuanced understanding to ensure you're maximizing benefits while following IRS regulations.

What is a qualified charitable distribution? 

Let’s break it down. Qualified refers to the tax code. In order to get the “extra” tax benefits, the gift needs to be to a 501©(3) charity. These are the charities that you usually get a tax deduction for – think churches, the Red Cross, St. Jude, etc.  What they aren’t is political organizations.

“But wait! I don’t itemize anymore, so I don’t get a deduction for giving to charity.” 

This is where age has its benefits. If you are over the age of 70.5 it comes off a different part of your tax return than where your charitable deductions used to come off with your itemized deductions. Again, as with all tax strategies, please consult your tax advisor. Also, qualified charitable distributions can count towards your Required Minimum Distributions if you are age 73 or older in 2024. 

What pitfalls should you avoid?

  • The contribution must be made after your 70.5 birthday. If you turn 70 in May, the distribution needs to be made in November or later. 
  • The distribution must be made directly from your IRA. This means that a check is cut from the IRA with the charities name on it. It cannot go to your bank account and then you give the funds to the charity.
  • You need to make sure that you receive confirmation from the charity of your contribution.
  • Distributions need to be made prior to meeting your required minimum distributions for the year. This is the way that the law was written.
  • The charity needs to cash your check in order for the contribution to count – so if you send it in December and they don’t cash it till January, it won’t count as a qualified charitable distribution for the tax year and it won’t count towards your required minimum distributions.
  • The distribution cannot be made from an active retirement plan – this means no 401ks and no active SEP IRAs or SIMPLE IRAs.
  • This strategy works best from pre-tax IRA accounts.
  • The maximum that you can do each year is $100,000.
  • Most importantly, you need to communicate to your CPA that you made a qualified charitable distribution so that they can report it properly on your tax returns. When I am reviewing tax returns, this is one of the items that I am looking for. CPAs process a lot of tax returns in a very short period of time. If you just tell them that you made a charitable donation instead of a qualified charitable distribution, it might get missed.

 

Qualified charitable distributions offer a meaningful way to support charitable causes while potentially optimizing your tax situation during retirement. It’s also important to consult with a financial advisor or tax professional who can take into account your individual circumstances. Embrace the opportunity to give back with purpose, and make sure you're doing your QCDs the right way.