Planning to make a year-end donation to charity? If you’re retired, financial experts have a useful tip for enhancing your tax benefits. Direct donations from your individual retirement account, known as qualified charitable distributions or QCDs, can amplify your tax advantages, the IRS rules indicate that retirees can give even more in 2024.
Sandi Weaver, a certified financial planner and public accountant in Kansas, asserts that QCDs almost always offer the most substantial tax advantage over other giving methods.
For those aged 70½ and above, a QCD offers a way to transfer up to $105,000 tax-free from a pre-tax IRA in 2024, marking an increase from $100,000, courtesy of the Secure 2.0 Act. The limit is set to rise to $108,000 in 2025, according to IRS guidelines.
When it comes to filing taxes, you have to choose between the standard deduction and itemizing deductions, including charitable contributions. However, with the standard deduction significantly increased since 2018, only about 10% of taxpayers itemized in 2021, meaning most didn’t take the charitable deduction.
Juan Ros, a partner at Forum Financial Management, highlights that while QCDs don’t provide a tax deduction, the distributed amount is excluded from income, which proves more beneficial than a deduction. If eligible, prioritize using QCDs for any charitable giving.
Experts also point out that QCDs won’t increase your adjusted gross income (AGI), a critical factor since higher AGI can affect Medicare Part B and Part D premiums through income-related monthly adjustment amounts (IRMAA). In 2024, premiums could rise if your modified adjusted gross income (MAGI) exceeds $103,000 for single filers or $206,000 for couples filing jointly. Notably, there’s a two-year lookback, so 2024 premiums are based on your 2022 MAGI.
QCDs also have the added advantage of reducing your AGI by offsetting your required minimum distribution (RMD). With pre-tax IRA balances growing due to a booming stock market, some retirees face higher RMDs. As of June 30, the average IRA balance was $129,200, up 14% from the previous year, according to Fidelity.
Since 2023, most retirees have been required to begin drawing RMDs from pre-tax retirement accounts at age 73. Utilizing QCDs can therefore be a strategic tool in managing tax liabilities and aligning with your financial goals in retirement.
