America is among the most charitable nations on earth, giving nearly $500 billion to worthy causes in 2022 not including taxpayer-funded aid programs. The total declined only slightly from 2021’s record $517 billion adjusted for inflation, despite a 20% drop in the stock market and a 9% decline in household wealth during the year according to the Lilly Family School of Philanthropy at Indiana University and Purdue University at Indianapolis. Nearly two thirds of that $500 billion was given directly by generous individuals.
Yet many charitably oriented taxpayers who are subject to required minimum distributions from their retirement accounts may be missing out on one of the best tools for supporting their favorite charities and reducing their tax bill: qualified charitable contributions, sometimes known as charitable IRA rollovers.
Many people are aware that they can donate appreciated stocks from a taxable account and receive a deduction for the market value of the securities if they choose to itemize on their tax return rather than claim the standard deduction. But a qualified charitable contribution or QCD is a directed contribution from an IRA account to a qualified charitable organization that counts as the donor’s minimum required distribution as well, up to a total of $100,000 each year, and does not require the taxpayer to itemize. There are specific rules that donors must carefully follow but the benefit can be significant and often allow donors to magnify the impact of their gifting.
In the aftermath of the financial crisis and the ensuing decline in charitable giving, Congress created a temporary provision as part of the Pension Protection Act of 2006 allowing for individuals to make charitable contributions from their IRA accounts that applied toward their required minimum distributions (RMDs) once they attained the age of 70 ½. Following four separate temporary annual extensions, the provision was codified permanently in 2015 and presents an attractive opportunity for tax efficient giving but remains underutilized.
Thanks to two iterations of the Setting Every Community Up for Retirement Enhancement (SECURE) Act that made significant changes in tax law, the new age for beginning required minimum distributions is now 73. IRA holders (other than Roth IRAs) who attain that age must begin withdrawing funds each year at a pace that would theoretically deplete the account over their statistical lifetime. Pre-tax funds in the IRA that have not been previously taxed are reportable as ordinary income on the individual’s returns and can nudge the taxpayer into a higher bracket if the account is significant.
A QCD allows the minimum distribution to be directed to a qualified charity without including the amount as taxable income each year. The account holder may make the charitable contribution in excess of their actual minimum required distribution, up to the $100,000 limit, but excess contributions may not be carried over to satisfy RMDs in future years.
Eligible charitable organizations must be 501(c)(3) nonprofits, including religious organizations, but not all entities qualify. Private foundations are not eligible, and donor-advised funds managed by public charities on behalf of individuals, families, or organizations are also not qualified. However, as of 2023, certain trusts including charitable remainder unitrusts, charitable remainder annuity trusts, or charitable gift annuities are eligible for a one-time $50,000 QCD.
Qualified distributions can be diced up among any number of qualifying charities and from any taxable IRA, inactive SEP or SIMPLE accounts, inherited IRA, or 401(k) or 403(b) retirement accounts as long as the aggregate total falls below the annual maximum. QCDs also cannot benefit the donor directly, like for example admission to a benefit dinner or golf tournament in which the donor participates.
Qualified distributions can sometimes allow greater total tax-advantaged giving by individuals subject to deduction limits. For example, cash donations can only be deducted up to 60% of adjusted gross income and appreciated assets are limited to 30% of total AGI. A qualified charitable distribution does not apply toward the contribution limit, so in some cases a charitable IRA distribution can substantially boost the donor’s impact. In addition, for married couples who are each over 70 ½, each spouse may make the maximum $100,000 QCD designation. Note also that while the new age for required minimum distributions has been increased to 73, the minimum age for making a QCD remains 70 ½. Beginning in 2024, the maximum distribution amount will be indexed for inflation each year.
A QCD must be handled properly to qualify for exclusion from income. An IRA owner wishing to initiate a QCD must contact their investment advisor or account trustee (bank or broker) to request that a distribution be made directly to the target charities. A distribution made to an individual who then directs it to a charity does not count as qualified and must be reported as income, a mistake some taxpayers have made to their chagrin. A properly executed distribution is reported by the taxpayer on their federal tax return and the filer should be certain to receive a receipt or proper documentation of the completed distribution.
A qualified charitable distribution could be a very useful tool for charitably minded taxpayers subject to required distributions. Consult your tax professional and investment advisor to help you identify opportunities to enhance your impact and take full advantage of the tax breaks available in exchange for your generosity.