What are qualified charitable distributions and the related tax code.

Charitable giving is an important part of many people’s financial planning. Not only does it provide support for worthy causes, but it can also offer tax benefits. One way to maximize these benefits is through qualified charitable distributions (QCDs). In this blog post, we will explore what QCDs are and the related tax code.

What are Qualified Charitable Distributions?

A qualified charitable distribution (QCD) is a distribution from an individual retirement account (IRA) that goes directly to a qualified charitable organization. This distribution is excluded from the account owner’s taxable income, and it also counts towards the required minimum distribution (RMD) for the year.

To qualify as a QCD, the distribution must meet the following criteria:

• The distribution must be made from a traditional IRA or Roth IRA. It cannot be made from an employer-sponsored retirement plan, such as a 401(k) or 403(b).
• The distribution must be made directly to a qualified charitable organization. The account owner cannot receive the distribution and then donate it to charity.
• The distribution must be made after the account owner reaches age 70 ½. There is no maximum age limit for QCDs under current tax law.
• The maximum annual amount that can be distributed as a QCD is $100,000 per taxpayer.

Benefits of Qualified Charitable Distributions

There are several benefits of making QCDs, including:

• Reducing taxable income: QCDs are excluded from the account owner’s taxable income. This can be especially beneficial for taxpayers who do not itemize their deductions or who are subject to income phase-outs on their itemized deductions.
• Meeting RMD requirements: Once account owners reach age 72 (or 70 ½ for those who turned 70 ½ prior to January 1, 2020), they are required to take minimum distributions from their traditional IRAs each year. QCDs can be used to satisfy this requirement while also providing a tax benefit.
• Supporting charities: QCDs provide a way for taxpayers to support charitable organizations that they care about while also receiving tax benefits.

Tax Code Provisions for Qualified Charitable Distributions

QCDs are governed by several provisions of the tax code, including:

• Section 408(d)(8) of the Internal Revenue Code (IRC): This provision allows for QCDs to be excluded from the account owner’s taxable income, up to a maximum of $100,000 per year.
• Section 408(a)(6) of the IRC: This provision allows QCDs to count towards the account owner’s RMD for the year.
• Section 170(b)(1)(A) of the IRC: This provision defines which organizations are considered qualified charitable organizations for the purposes of QCDs. Generally, these organizations must be operated exclusively for charitable, religious, educational, scientific, or literary purposes.

How to Make Qualified Charitable Distributions

To make a QCD, the account owner should contact their IRA custodian and request a distribution to the qualified charitable organization of their choice. It is important to ensure that the distribution is made directly to the charity and that the account owner does not receive the funds first.

The charity will typically provide the account owner with a receipt or acknowledgement of the donation, which can be used for tax purposes.

Conclusion

Qualified charitable distributions are a valuable tool for individuals looking to support charitable causes while also maximizing their tax benefits. By following the criteria outlined in the tax code, taxpayers can make tax-free distributions from their IRAs directly to qualified charitable organizations. This not only reduces taxable income but also counts towards required minimum distributions. As with all tax matters, it is important to consult with a qualified tax professional to ensure compliance with all applicable laws and regulations.

Please feel free to reach out for help with any of your investment, insurance, or financial planning needs.  Chase Thomas chtomas@alphawealthfunds.com