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Tax advantages of qualified charitable distributions

ARTICLE | July 19, 2022

An individual retirement account (IRA) is a powerful retirement saving tool. But once you reach age 72, you must begin taking distributions, which are not only taxed as ordinary income but may push you into a higher tax bracket. 

A qualified charitable distribution, or QCD, is an excellent way to avoid this problem. QCDs are distributions from an IRA made directly to a qualified charity. The distribution is not included in your taxable income and is an excellent way to support the causes you care about. 

A qualified charitable distribution is a withdrawal from an Individual Retirement Account (IRA) that is given directly to a qualified charity. Qualified charities do no include private foundations, donor-advised funds or supporting organizations. Before making a distribution, check with the charity to ensure they are qualified to accept a QCD.

In addition, the contribution must be made directly from the IRA to the charity; it cannot be withdrawn and deposited in a personal account for any amount of time.  

The distribution must be made after the IRA owner reaches age 70½, and the amount cannot exceed $100,000 per year. It's worth noting that QCDs can be made before you're required to take an RMD. 

Charitable distributions from an IRA can provide taxpayers with a number of tax advantages. One of the major advantages is that it is an above-the-line deduction that can help reduce your adjusted gross income (AGI). You don't pay income taxes on the distribution, and the AGI reduction can help you qualify for other valuable tax breaks. 

For example, if your AGI is below a certain threshold, you may be eligible for a reduced tax rate on long-term capital gains. It can also lower the threshold for deducting medical expenses (which are only deductible if they exceed 7.5% of your AGI).  

Additionally, a lower AGI can help you avoid the Medicare Part B and D premium surcharge imposed on high-income taxpayers. Moreover, QCDs remove assets from one's estate, making them an attractive option for taxpayers concerned about leaving a taxable estate to their heirs. 

Overall, the tax advantages of a qualified charitable distribution can be significant, making it worth considering for taxpayers looking for ways to minimize their tax liability. 

This article is intended to provide a brief overview of qualified charitable distributions and is not a substitute for speaking with one of our expert advisors. If you'd like to learn more about minimizing your taxes with qualified charitable distributions, please contact our office.

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HMA CPA offers a full range of tax, accounting and consulting services for closely held businesses, their owners, and high net worth individuals. We value relationships and are committed to providing close, personal attention to our clients. Though our experience spans over 35 years in the accounting field, we also keep current with ongoing professional education so we can provide you with outstanding technical support and customer service.

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