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What is a Qualified Charitable Distribution?

What is a Qualified Charitable Distribution?

January 14, 2023
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Qualified Charitable Distributions: A Great Way for Making Tax-free Gifts to Charities and Saving Money on Your Taxes

A qualified charitable distribution (QCD) is a provision in the U.S. tax code that allows individuals who are 70.5 years of age or older to make a direct transfer of funds from their individual retirement account (IRA) to a qualified charity, without having to pay income tax on the distribution. This provision can be a valuable tax-saving strategy, especially for older taxpayers who are required to take minimum distributions from their IRAs but do not need the income. Those who are already making charitable contributions but can’t deduct the contributions because they don’t itemize their deductions on Schedule A. Transferred amounts are not taxable, and no deduction is available for the transfer.

How does a QCD work? Required Minimum Distributions (RMD) or any other distribution from an IRA is subject to income tax, which can increase a person's overall tax liability. However, by making a QCD, the individual can satisfy their required minimum distribution while also supporting a charitable organization of their choice and removing the direct contribution from their taxable income.

To qualify for a QCD, the distribution must be made directly from the IRA to the qualified charity. The distribution must also be made in cash, and the individual cannot receive any goods or services in exchange for the donation. The maximum amount that can be excluded from income for a QCD is $100,000 per taxpayer per year.

The benefits of making a QCD are two-fold. Firstly, the individual can reduce their taxable income by making a charitable donation directly from their IRA. Secondly, the individual can support a charitable organization that aligns with their values and interests.

It is important to note that not all charitable organizations qualify for QCDs. Only organizations that are tax-exempt under section 501(c)(3) of the Internal Revenue Code, such as most religious and educational organizations, are eligible.

In summary, a qualified charitable distribution is a tax-saving strategy that allows individuals who are 70.5 years or older to make a direct transfer of funds from their individual retirement account to a qualified charity, without having to pay income tax on the distribution. This can be a valuable way for older taxpayers to support their favorite charity while reducing their overall tax liability. For more information on follow the link below to the IRS’s Qualified Charitable Distribution discussion page.

https://www.irs.gov/newsroom/reminder-to-ira-owners-age-70-and-a-half-or-over-qualified-charitable-distributions-are-great-options-for-making-tax-free-gifts-to-charity