What Are Qualified Charitable Distributions (QCDs) and How Do They Work?

As an asset protection lawyer can advise you, qualified charitable distributions(QCDs) may be useful for making tax-free charitable donations under some circumstances. However, while there are advantages to using a QCD for some individuals, there are limitations to its usefulness. A Florida asset protection attorney from Kramer Green can help you determine whether a QCD is the right asset protection mechanism to meet your needs.

Required Minimum Distributions from IRAs

Under the SECURE Act, owners of traditional, SEP, SARSEP, and SIMPLE IRA accounts had to begin taking required minimum distributions (RMDs) at age 72, even if they were still working. However, account holders could delay taking their first RMD until April 1st of the year following the year in which they turned 72. In workplace retirement plans, account holders had to take their first RMDs by April 1st in the later of the year in which they turn 72 or the year in which they are no longer employed (if the plan allows).

However, in late 2022, Congress passed the SECURE Act 2.0, which, in part, increases the age at which you must take RMD from 72 to 73 beginning in 2023. Under the new law, if you turn 72 in 2023, you will not have to take your RMD until 2024 or no later than April 1, 2025. In 2033, the RMD will increase to age 75.

The amount of your RMD is calculated based on the account’s value as of December 31st of the prior year and a life expectancy factor published by the IRS. In addition, the IRS publishes tables and worksheets to help you calculate the RMD for your retirement accounts. You must take all your RMD to avoid paying a 50% excise tax on the amount of the retirement account that was not distributed as required. However, in 2023, this penalty will decrease to 25%. Furthermore, if the individual remedies the failure to take the RMD promptly, the penalty decreases to 10%.

Qualified Charitable Distributions (QCDs) and RMDs

According to the Internal Revenue Service (IRS), a qualified charitable distribution (QCD) is an “otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity.” A QCD is also commonly known as a “charitable IRA rollover.”

You can use a QCD to satisfy all or part of your RMD from a retirement account. For example, if your RMD for 2022 was $10,000, and you made a $5,000 QCD, you still would have to make an RMD of $5,000 for 2022.

Benefits of QCDs

One benefit of QCDs is that they can help lower your taxable income. You may not need the income from your traditional IRAs or those retirement accounts subject to RMDs in some years or all years because your other sources of income are sufficient to meet your expenses. The additional IRA income can push you into a higher tax bracket, triggering more tax liability. Furthermore, a higher tax bracket can have adverse consequences for certain tax credits and deductions, as well as your Social Security and Medicare benefits. For instance, increased income can lead to higher premium payments for Medicare Part B and Part D.

As mentioned above, failure to take RMDs can have stiff tax penalties. Using a QCD allows you to avoid income that pushes you into a higher tax bracket and still meet the RMD. As a result, you can bypass the adverse tax consequences of both taking the RMD and not taking the RMD simply by using the QCD for all or part of your RMD. In addition, you do not report the QCD as taxable income, and you owe no taxes on the IRA distribution because it was distributed as a QCD and went straight to charity.

For some donors, QCDs may have more tax savings than those who donate cash to their preferred charities because QCDs reduce adjusted gross income (AGI). Since AGI is used in several key tax calculations, it may be advantageous for the donor to have their AGI reduced by QCDs rather than by charitable tax deductions.

Additionally, qualified charitable distributions allow the donor to have the tax benefits of the charitable contribution even if the donor does not itemize deductions. Otherwise, the only way to claim the charitable tax deduction is to itemize deductions on your tax return. However, with recent changes in tax laws, it may be advantageous for you to use the higher standard deduction. If that is the case, you can still make charitable donations that reduce your taxable income through a QCD without itemizing deductions.

Limitations on QCDs

Some limitations on QCDs do exist. For instance, donors must be at least 70 and ½ years old to make QCDs. In addition, qualifying charities must be 501(c)(3) organizations; they cannot be donor-advised funds, private foundations, or supporting organizations.

A donor can contribute a maximum of $100,000 per year to an operating charity through qualified charitable distributions. Couples who submit tax returns with married filing jointly status can each make a maximum of $100,000 per year in QCDs. Under the Secure Act 2.0, beginning in 2024, the $100,000 annual maximum will be indexed for inflation.

However, the $100,000 maximum is only available to some. The Secure Act makes individuals who are 70 and ½ years or older newly eligible to contribute to IRAs. If these individuals make deductible IRA contributions, they must decrease their $100,000 QCD maximum limit to account for their contributions. In other words, you cannot make IRA contributions after age 70 and ½ and then turn around and use those contributions as qualified charitable distributions.

Expansion of the QCD by the Secure Act 2.0

Beyond the indexing of the $100,000 annual QCD contribution maximum for inflation, the Secure Act 2.0 also expands qualified charitable distributions by allowing a one-time transfer of up to $50,000 to fund one of the following:

  • Charitable remainder annuity trust (CRAT);
  • Charitable remainder unitrust (CRUT); or
  • Immediate charitable gift annuity (CGA).

The one-time transfer increases to $100,000 if each spouse contributes $50,000 from each of their IRAs. The income beneficiaries of the CRAT or CRUT must be the IRA owner and their spouse. If the IRA owner chooses to create a CGA, payments must begin no later than one year following the date of the one-time transfer at a fixed rate of five percent or greater.

Look to Kramer Green for Help Protecting Your Assets

The Florida asset protection lawyers of Kramer, Green, Zuckerman, Greene & Buchsbaum, P.A. are prepared to assist you and your family through every step of creating the estate plan that best meets the needs of you and your family, including using qualified charitable distributions, if appropriate. We know how to most effectively and efficiently draft an estate plan that achieves your goals, protects your heirs, and avoids the time and cost involved in probate proceedings.

Our objective is to guide you through the complex legal matters that estate planning can involve. In addition, we want to help you lessen the burden on the surviving loved ones you will leave behind. Contact our office today at (954) 966-2112 or reach out to us online to schedule a time to discuss your legal estate planning issues with our attorneys.

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