Have you reached the age of 70½ and are looking for ways to save on tax? If so, qualified charitable distributions (QCDs) may provide you with tax advantages by making cash donations directly from your IRA to IRS-approved charities.

The Basics of QCD

Traditional IRA distributions are wholly or partially taxable, but QCDs made from tradition IRA(s) are free from federal income tax. Despite not being able to claim itemized deductions for QCDs, that tax-free treatment of QCDs is equal to a 100% deduction.

There are three requirements an IRA distribution must meet to be a QCD:

1. You must be 70½ year of age or older when it is made.
2. Normal tax-law requirements for a 100% deductible charitable donation must be met.
3. The distribution must be otherwise taxable.

QCD Limits

After adjusting for inflation, the 2024 limit has been increased to $105,000 from $100,000 under SECURE Act 2.0. It will increase to $108,000 in 2025. Each spouse with IRAs set up in their respective names can benefit from the limit as it applies to each individually.  For inherited IRAs from a deceased individual, the new owner can make a QCD once they reach the age of 70½.

Five Tax-Savings Advantages

The tax savings advantages of QCDs include:

1. QCDs are not included in Adjusted Gross Income (AGI). Because of this, there is a decrease in your chances of being affected by unfavorable AGI-based rules and being subject to the 3.8% net investment income tax on investment income.
2. When the Tax Cuts and Jobs Act increased standard deduction amounts, that decreased the likelihood of “regular” charitable donations having a substantial tax benefit because itemized deductions, which includes the donations, would need to exceed the standard deduction to be effective. QCDs are always able to provide a tax benefit and are not limited to 60% of AGI like “regular” charitable donations.
3. Taxable required minimum distributions (RMDs) can be replaced with tax-free QCDs. If you are older than or turn 73 during the year for 2024 and 2025, you are subject to IRA RMDs. To avoid paying tax on these distributions, you can make a QCD from your traditional IRA(s) that count as an RMD.
4. IRA balances are composed of layers including a taxable layer and a nontaxable layer. The taxable layer stems from deductible contributions and account earnings while the nontaxable layer stems from nondeductible contributions. QCDs are treated as coming from the taxable layer but they are tax free. The nontaxable amounts are left behind in your IRA(s) and later can be withdrawn tax-free by you or your heirs.
5. Although today’s large federal estate exemption of $13.61 million and $13.99 million in 2024 and 2025, respectively, leaves most folks without a concern, QCDs do decrease your taxable estate.

Act Now Before Year End

If you have more money than you need for retirement, the QCD strategy may provide a tax-smart opportunity for you. It is a way to not only be charitable, but also take advantage of tax saving opportunities. Reach out to a Wegner CPAs tax advisor if you would like to further discuss QCDs.