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Understanding Qualified Charitable Distributions: A Guide for Donors
Published Date : October 29, 2024
In an age where philanthropy plays a crucial role in supporting communities, understanding the nuances of charitable giving is essential. Qualified charitable distributions (QCDs) offer unique tax advantages, making them an attractive option for many donors.
As we move into the holidays and the season of giving, it’s a great time to explore the benefits of QCDs. Whether you’re looking to maximize your philanthropic efforts or seeking tax advantages, QCDs can be a powerful tool in your financial planning. Here’s what you need to know.
What are Qualified Charitable Distributions (QCDs)?
QCDs are donations made directly from an individual retirement account (IRA) to a qualified charity. This type of contribution is permitted by the IRS for individuals aged 70½ or older, allowing them to transfer up to $105,000 per year (in 2024) without incurring income tax on the amount withdrawn as a typical IRA distribution would. One of the key benefits of QCDs for IRA owners over the age of 73 is they allow donors to support their favorite charities while helping to satisfy the annual required minimum distribution (RMD) without incurring income tax.
Eligibility Requirements
As previously stated, to qualify as a QCD, the donor must be 70½ years old or older at the time of the donation. The donation must be made directly from a traditional IRA, rollover IRA or inherited IRA. Roth IRAs are not eligible. A donor who inherits an IRA also inherits the ability to use the IRA to make QCDs, but only when they reach the eligible age of 70½. The age of the original owner at passing is no longer relevant. In order to be excluded from taxable income, the contributions must go to a qualified 501(c)(3) organization, not to just any nonprofit. This is an important distinction. A 501(c)(3) is a federal, nationwide designation awarded by the IRS while a nonprofit corporation is a state-level designation and is not recognized but the IRS as being tax-exempt.
How to Make a QCD
Step one is to identify your charity or charities. As referenced above, be sure to verify that the organization is a qualified 501(c)(3) to ensure your donation qualifies for tax benefits. Step two is to request that your IRA custodian send the funds directly to the charity to meet the QCD requirements. The gift must never pass through any personal account as that will void its tax-exempt status.
Like with any important financial documents, make sure to keep records. It is commonplace for charities receiving the gift to acknowledge that gift with a letter if your name and address are on the check, but if they don’t do it automatically, be sure to reach out to get confirmation of the gift. According to the IRS website, the letter should include the following:
• Name of the organization
• Amount of cash contribution
• Description (but not value) of non-cash contribution
• Statement that no goods or services were provided by the organization, if that is the case
• Description and good-faith estimate of the value of goods or services, if any, that organization provided in return for the contribution
• Statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case
QCDs are an excellent way for eligible individuals to support their favorite causes while optimizing their tax situation. As with any financial decision, it’s advisable to consult with your tax professional and Sand Hill Wealth Manager to ensure compliance with IRS regulations and to maximize the benefits of your charitable giving. Embracing QCDs can enhance your philanthropic efforts, allowing you to make a significant impact in your community.
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