QCDs: Pay Less Taxes. Help the Planet

Are you a retired individual with a tax-deferred Individual Retirement Account (IRA)?

Once you reach a certain age, you’re required to start withdrawing money from your IRA. The additional income you receive can push you into a higher tax bracket, which means you’ll have to pay more taxes. This can have a significant impact on your net income. 

Because of this, many retirees opt to donate the money (all or part of it) to their chosen institutions. Known as the qualified charitable distribution (QCD) rule, this requirement enables them to deduct certain amounts from their annual taxable income.

The result is a win-win because their withdrawals don’t get taxed, they can remain in the same tax bracket, and they get to choose which causes to support.

If you’re interested in enacting the QCD rule to help nonprofits like Paso Pacifico, join us as we tell you all you need to know.

What Are QCDs?

A qualified charitable distribution is a tax-free withdrawal from a traditional IRA that is donated to one or more qualified charities. 

Also called IRA charitable rollovers or IRA charitable distributions, it enables individuals who are 70 1⁄2 years old and above to donate their withdrawals without being taxed. 

The amount withdrawn is known as the required minimum distribution (RMD). As of 2024, qualified individuals can give up to $105,000 annually from their RMDs as tax-exempt donations.

How Do QCDs Work?

If a person wants to fulfill their required minimum distributions through QCDs, they must have one of the following IRA types (which are not employer-sponsored):

• A traditional or inherited IRA
• An inactive Simplified Employee Pension (SEP) plan
• An inactive Savings Incentive Match Plan for Employees (SIMPLE) IRA

Under certain circumstances—such as when an individual doesn’t meet the requirements for a qualified distribution—they can avail of the QCD with a Roth IRA. The Roth IRA typically doesn’t require withdrawals until the beneficiary’s death.

However, this is rarely advantageous as distributions from a Roth IRA are generally tax-free.

Note that for non-inherited IRAs, the QCD will be reported as normal distribution on IRS Form 1099-R. You can refer to IRS Form 1040 for more information regarding this. 

Understanding the Intricacies of QCDs

For your QCD to count towards your RMD, the money should not pass through your hands. Your donation must come directly from your IRA account through an electronic funds transfer or a check initiated by the IRA custodian. You can also deliver it yourself, but you’ll have to ensure that the donation gets a written acknowledgment from the charity of your choice.

Remember, QCDs can only be made during the current calendar year, usually until December 31. If you missed the deadline and didn’t use your RMD as a QCD when you were supposed to, it can’t be counted towards the previous year and will still be subject to taxation.

To avoid this, the Internal Revenue Service (IRS) recommends following the first-dollar-out rule. It essentially means that you should arrange your QCD with the IRA and your chosen charity first and during the early part of the year before withdrawing whatever’s left. This gives them time to complete the transaction while allowing you to enjoy the QCD’s tax-exempt benefits.

What Types of Charities Are Eligible for QCD?

Not every organization categorized as a charity qualifies for QCD. Based on the tax code, only charities classified as 501(c)(3) organizations (like Paso Pacifico, EIN 20-3396421) are eligible to receive tax-deductible contributions. Donating to private foundations, donor-advised funds, and supporting organizations won’t exempt your RMD from taxes.

Retirees can also donate their RMDs to split-interest entities, nonprofits that manage the funds they receive and share them with other beneficiaries (usually noncharitable). 

As of 2024, qualified IRA account holders can make a one-time donation of up to $54,000 to the following types of split-interest entities:

• charitable remainder annuity trusts (CRATs)
• charitable remainder unitrusts (CRUTs)
• charitable gift annuities

What’s unique about this option is the donor receives a fixed percentage of their donated funds for life.

However, there are certain rules that determine your eligibility. Before giving a gift, it’s best to consult a tax advisor.

Benefits of QCDS

Let’s take a closer look at the benefits of QCDs.

Lower Your RMDs

As of January 2023, IRA account holders must start withdrawing their RMDs once they turn 73 years old. If it is not withdrawn, they could be liable for a 50% excise tax on the amount that wasn’t distributed. 

Fortunately, you can start using QCDs as early as 70 ½ years old. Doing so reduces your IRA balance and lowers your RMD withdrawals in the future. 

Pay Less Income Taxes 

Regular withdrawals from IRAs are taxable. When you use your required withdrawals as QCDs, however, they aren’t considered taxable income. Plus, they don’t have to be itemized, which significantly lowers your adjustable gross income (AGI) if you apply the standard deduction.

This keeps you from being pushed into higher income brackets so you aren’t taxed as much. It also keeps you safe from phaseouts, which can limit your tax credits and deductions.

Here’s a Simplified Example

A 74-year-old has an annual RMD of $15,000 and an annual pension of $50,000. This brings his annual total income to $65,000, making him qualified for 2024’s $59,851 to $95,350 tax bracket. 

Without the RMD, the retiree would only have to pay 12% in taxes. But because the RMD moved him up to the next tax bracket, he now has to pay 22% in income taxes.

Without the QCD rule and under his new tax bracket, he would pay $14,300 in taxes and only get to keep $50,700 from the original $65,000. [$65,000 x 22% = $14,300, he keeps $50,700]

With the QCD rule, he can donate $2,000 to revert to his former tax bracket. This means that he would only pay $7,560 in taxes and get to keep $55,440. [($65,000 – $2,000) X 12% = $7,560, keeps $55,440]

$55,440 versus $50,700 may not seem like much but imagine if higher amounts were involved. Heads of households who earn over $609,350 a year get taxed 37%!

Support Your Favorite Charities

Thanks to QCDs, you can make a larger charitable gift as the amount comes directly from your IRA. Since you aren’t receiving your RMD as income, you don’t have to pay income tax on it, which makes your contribution bigger than cash and other appreciated securities. 

If you and your spouse are at least 70 ½ years old and have tax-deferred IRAs, you can double your donation to $210,000 through married filing jointly.

How Do QCDs Compare to Charitable Deductions? 

Charitable deductions are often mentioned as a means to offset taxes but how do they compare to QCDs?

QCDs can only be used by individuals who are at least 70 ½ years old and have tax-deferred IRA accounts. The maximum annual QCD is $105,000 per year. As long as you don’t exceed this amount, you don’t have to itemize it. 

The amount is transferred directly by the IRA custodian. A retiree who avails of the QCD gets to deduct the donated amount from their taxable income, thus lowering their tax obligation.

With charitable deductions, you don’t have to wait until you’re 70 to start donating. The maximum amount you can donate is 60% of your annual gross income (AGI). Technically, this should reduce your taxes but since it comes from your personal account and not your RMD, the tax benefits are much lower. Moreover, you have to itemize the deductions.

By comparison, RMDs are much simpler to understand and execute.

Paso Pacifico: A QCD-Eligible Nonprofit

Paso Pacifico is a 501(c)(3) certified organization. This means that your donations to us qualify for federal tax exemption. 

By assigning your QCDs to Paso Pacifico, you can help protect and restore the ecosystems of Mesoamerica’s Pacific Slope. This vital region is comprised of endangered eastern Pacific coral reefs, mangrove wetlands, and dry tropical forests. 

We work with partner organizations, landowners, and local communities to preserve the region’s wildlife corridors. As we secure core habitats, we also drive awareness and conservation of endangered animals like cyanoptera macaws, sea turtles, yellow-naped amazon parrots, stingless bees, and more.

Enjoy the benefits of QCDs while protecting biodiversity. Donate to Paso Pacifico.