You donate to your favorite charity each year because it makes you feel good to support a cause that means something to you. The tax benefits received for your philanthropy are a bonus. However, if you are over 70.5, you can support your favorite charity by increasing the tax savings beyond the charitable deduction using a Qualified Charitable Distribution.

A Qualified Charitable Distribution (QCD) is when funds are sent from your qualified retirement account directly to your favorite charity. Even though this is a distribution, it is not taxable to you. It is a surprisingly simple strategy that can have significant tax benefits during retirement.

70.5 is the magic number.

There are, shockingly, few rules when it comes to a Qualified Charitable Distribution. They are specific, though.

• You must be at least 70.5 to use the QCD.
• The payment must be directly transferred from your retirement account to a public charity, not private foundations or donor-advised funds. It cannot go to you first; you write a check to the charity.
• The maximum amount to qualify for a QCD is $105,000 annually (2024).
• This is a per-person rule, so you and your spouse can each make a $100,000 QCD.
• A QCD can only occur in the following accounts
  • Traditional IRAs
  • Inherited IRAs
  • SEP IRAs/SIMPLE IRAs if they are no longer receiving ongoing employer contributions

QCDs can ease the pain of the dreaded RMDs (No, it’s not a medical condition)

The government allows you to defer taxes in your retirement accounts for years to encourage retirement savings. Uncle Sam eventually wants to begin collecting his tax dollars. That’s when you get a chronic condition known as the Required Minimum Distribution (RMD) at age 73.

Even if you don’t have a financial need, you have no choice, hence the “R” for required in RMD. These distributions are taxed as income, and if your qualified retirement accounts are substantial, this could severely impact your tax liability. That is not something you want to deal with in retirement.

Qualified charitable distributions can help your favorite charity and your bottom line.

The beauty of the QCD is that you can reduce or avoid the taxes on those RMDs by transferring your distribution directly from your retirement account to a qualified charity beginning when you reach 70.5. You can get a head start and begin QCDs two and a half years before RMDs. Once you reach 73, a QCD has the double benefit of being a tax-free distribution AND counting as an RMD. That’s a win-win.

That elimination/reduction of taxable income using QCDs goes much deeper than the noticeable reduction in your income tax. Potential long-term tax benefits allow you to keep more of your retirement savings.

1. A reduction in Social Security taxability

OK, honestly, the thresholds to keep Social Security tax-free are meager. A QCD could be the difference between having 0%, 50%, or 85% of your Social Security becoming taxable. It’s a narrow range from 0% to 85%, and unfortunately, most of you will fall into the 85% category, but for those close to the 0% or 50% range, the QCD could be the difference.

2. Avoidance of the 3.8% Medicare surtax on investment income

RMDs are not subject to the 3.8% Medicare surtax created to help pay for the Affordable Care Act. RMDs can put you over the income limits of $250,000 for couples filing jointly ($200,000 for singles), which would make any investment income you have subject to the additional 3.8% tax. A QCD may be the only option you have to get under the income limits

3. Prevent higher Medicare premiums

You may not know this, but all retirees do not pay the same amount for Medicare premiums. It is income-dependent. If your income is more than $103,000 (individual) or $206,00 (married), you will be assessed Medicare Part B and Part D surcharges. The level of the surcharge depends on your income. Here are the details.

That is no small chunk of change, month after month, year after year, of paying surcharges. A QCD could be a financial lifesaver if you could eliminate higher Medicare premiums. I don’t have enough fingers to add up the potential savings.

4. Get the tax benefit back

Without the QCD, the only way to receive a tax benefit for charitable contributions is to take a deduction, which only works if you can itemize. The Tax Cut and Jobs Act made itemizing your taxes much less likely. So, if you cannot itemize, the QCD can get the tax benefit back.

The simple QCD process

There is a simple 3-step process to complete a QCD.

1. Contact the charity to verify their information and where to send the check, and let them know the check will be on its way.
2. Complete a distribution form with the charity’s info. It should have a QCD section. No taxes are withheld! The IRA custodian will then mail the check.
3. At tax time, you report the charitable distribution on the line for IRA distributions. For the taxable amount, enter zero if the total amount was a qualified charitable distribution. Enter “QCD” next to this line. There’s no box on a 1099-R for QCDs for some reason.

A QCD isn’t just for the wealthy. It doesn’t have to be for thousands of dollars; it could be for fifty bucks. It’s not just for one charity but works best for multiple charities. Think about where you donate throughout the year. Look at last year’s tax return to see if you itemized or your checkbook if you didn’t.

If you’re over 70.5 and follow the steps precisely, you can use a QCD for your usual yearly giving. Your favorite charity can receive your gift, and you can receive the tax benefit.

If you know a generous soul approaching or over 70.5, share this with one of the buttons below. They’ll thank you for saving them some tax dollars.