Qualified Charitable Distributions (QCDs)
Donating to the church using a Qualified Charitable Distribution can result in significant tax savings.
What is a Qualified Charitable Distribution (QCD)?
A Qualified Charitable Distribution (QCD) is a transfer of funds from an Individual Retirement Account (IRA) directly to a qualified charitable organization. A QCD is arranged through the person’s IRA custodian or fiduciary, and the gift is made directly to the charity. QCDs can be used by taxpayers over the age of 70 ½ who have a traditional IRA account to make charitable contributions.
What are the tax advantages of making a QCD?
Funds withdrawn from an IRA are typically taxed as regular income. The effect of this income (RMD or other withdrawals) may push you into a higher tax bracket and reduce your eligibility for certain credits and deductions. Funds withdrawn from an IRA as a QCD are NOT COUNTED as income and therefore will not add to your overall income and tax liability. A lower taxable income may also serve to lower taxes paid on Social Security benefits and further reduce your tax liability. The current high Standard Deduction now prevents many taxpayers from itemizing and deducting their charitable contributions, this makes the use of a QCD to donate to your charity attractive and beneficial.
See following example of QCD tax saving potential.
The example below makes the following assumptions:
- Taxpayer (TP) and spouse are over 70 ½ and have an IRA.
- They will withdraw $5,000 from IRA for donation to church.
- They will take the Standard Deduction in 2022 o $28,700.
- Their estimated 2022 taxable income is $50,000. ($45,000 from other sources + $5,000 from IRA withdrawal).
Scenario 1: TAXPAYER DOES NOT USE QCD
- Withdraws $5,000 from IRA and deposits to checking account.
- Writes $5,000 check to church from checking account.
- 2022 Taxable Income (before Standard Deduction) = $50,000.
- 2022 Taxable income after Standard Deduction = $ 21,300 ($50,000-$28,700).
- Federal Income Tax on above = $2,145.
Scenario 2: TAXPAYER USES QCD
- Instructs IRA custodian to make $5,000 QCD to church.
- 2022 Taxable Income (before Standard Deduction) = $45,000 ($50,000 – $5,000 QCD).
- 2022 Taxable income after Standard Deduction = $16,300 ($45,000-$28,700).
- Federal Income Tax on above = $1,630.
By using a QCD, taxpayer saves $515 ($2,145-$1,630). QCD savings increase as taxable income increases.
Tips for making a QCD
- Contact the custodian or fiduciary of your IRA before your RMD or your QCD will be made.
- Specify gift amount, charity name, and charity mailing address.
- Be certain to have your name and the directions for your gift (Tithe, Building Fund, etc.) noted on the check and/or documentation sent to your charity.
- Inform your tax preparer and your charity that you are making a QCD.
- Want help with the QCD process? Need clarification on 2022 tax rules? Contact a TPC Certified Tax Counselor. Please email firstname.lastname@example.org for any follow up questions or to find a Certified Tax Counselor.