Gifting Strategies Using Qualified Charitable Distributions

Today’s blog post will examine an often-overlooked tax strategy for philanthropic purposes: Qualified Charitable Distributions (QCDs). 

At Brown|Miller Wealth Management, we understand that no one is interested in paying more taxes than is legally required. This is where you can make a charitable giving strategy impactful and tax-efficient.  

At the end of the day, you want to be able to pass your hard-earned assets on to future generations while also supporting the causes that are important to you.  

What is a Qualified Charitable Distribution?  

Qualified Charitable Distributions (QCDs) are a type of charitable donation made directly from an Individual Retirement Account (IRA) to an eligible charitable organization. For several reasons, QCDs can be a strategically beneficial component of your retirement, tax, and estate planning strategies:

• QCDs are only available to IRA owners who are 70½ years old or older. The maximum annual amount to be donated as a QCD is $105,000 per individual in  2024. 
• The funds must be transferred directly from your IRA to the qualified charity. The check should be made payable to the charitable institution and can either be mailed directly to the charity, or can be mailed to the IRA owner who can add a letter or memo before forwarding to the charity. 
• QCDs are excluded from taxable income, unlike distributions that benefit you, which are most often taxable events. This exclusion is especially advantageous because it does not impact your adjusted gross income (AGI). 
• QCDs require no special reporting by your IRA custodian; you will receive an IRS  Form 1099-R for the distribution. Please provide this form to your tax advisor during tax preparation time. Any questions should be referred to your tax professional.

Adjusted Gross Income and QCDs  

Qualified Charitable Distributions (QCDs) provide a straightforward method for lowering  your Adjusted Gross Income (AGI). This can have significant tax advantages, particularly if you manage your income level to optimize tax obligations and maintain eligibility for various tax credits and deductions.  

Here’s how QCDs assist with lowering AGI: 

• Typically, distributions from an IRA (including required minimum distributions) are added to your taxable income and reported on your tax return. However, since funds transferred as a QCD are excluded from your taxable income, you can satisfy all or a portion of your RMD using QCDs, which do not increase your AGI. 

Lowering AGI is beneficial for several reasons: 

• Tax Bracket Management: Reducing AGI can help keep you in a lower tax bracket, reducing the overall tax rate applied to your income.
• Eligibility for Tax Credits and Deductions: Many tax credits and deductions are phased out at higher income levels. Lowering AGI can help maintain eligibility for beneficial tax treatments such as medical expense deductions, which require  expenses to exceed a certain percentage of AGI. 
• Reduced Taxes on Social Security: Lower AGI can lead to lower taxes on Social Security benefits, as a smaller portion of these benefits becomes taxable depending on AGI levels. 
• Medicare Premiums: Medicare Part B and Part D premiums are based on MAGI from two years prior. A lower AGI could result in lower Medicare insurance premiums under the Income-Related Monthly Adjustment Amount (IRMAA). 

Why Include QCDs in Your Retirement Planning Efforts? 

As previously discussed, using QCDs to lower your annual income offers substantial tax benefits. There are also additional benefits associated with incorporating this strategy into your retirement plan: 

1. 1. 1. QCDs can be an effective tool for decreasing your estate’s taxable value while supporting charitable causes. 
      2. QCDs enable you to fulfill your philanthropic objectives by supporting eligible charities directly from your IRA. 
      3. Utilizing QCDs for charitable giving supports causes you care about and can assist with optimizing your tax strategy. This dual benefit can improve your overall cash flow by reducing your taxable income and, thus, your tax liability. 
      4. If you don’t itemize your deductions (taking the standard deduction instead), a QCD offers a way to make charitable donations that effectively allow for a tax benefit because the distribution does not count as taxable income. 
      5. QCDs can significantly benefit retirees by helping to manage and reduce their taxes on Social Security benefits. Social Security benefits are taxable based on your combined income, including your adjusted gross income (AGI), nontaxable interest, and half of your Social Security benefits. The portion of benefits subject to tax depends on these income thresholds: 

   a) Single filers:

• – Up to 50% of benefits are taxable if the combined income is between $25,000 and $34,000
• Up to 85% of benefits are taxable if combined income exceeds $34,000. 

1. b) Married filing jointly: 

• Up to 50% of benefits are taxable if the combined income is between $32,000 and $44,000
• Up to 85% of benefits are taxable if combined income exceeds  $44,000

Be aware that your tax obligation could be higher if you live in one of the ten states that tax Social Security. 

Using RMDs for a Purpose  

Our world today is complex, and there is constant pressure to make the right decisions. People are in need, so using QCDs can provide an exceptional way to give back to their communities while satisfying their RMDs for the year.  

This alignment means you can simultaneously meet your distribution requirements and support your favorite charitable causes—using your RMDs as a resource that helps less fortunate people. 

Why Consider Brown|Miller Wealth Management for QCD Charitable Giving?  

While you can implement a QCD strategy on your own, we always recommend working with a fiduciary financial advisor to create a sound strategy.  

Brown|Miller offers tailored wealth management services to high-net-worth individuals, families, businesses, endowments, and foundations in the Washington, D.C. area and nationwide.  

As an independent, privately owned registered investment adviser firm, we’re not tied to any parent company that dictates what we do for our clients. We are fiduciaries, so we’re ethically and legally committed to always acting in your best interest.

Our personalized financial advice is what makes us stand out. We take our fiduciary responsibility seriously and build genuine connections with our clients. Our well-crafted financial plans are designed to help you reach your financial goals and dreams. 

Trusted Credentials  

The Brown|Miller team also uses comprehensive research to create investment portfolios that align with your goals and risk tolerance. Our certified professionals bring a wealth of experience to help you find the right strategy: 

• Certified Financial Planner™ Professionals 
• Certified Investment Management Analyst (CIMA®) 
• Chartered Retirement Planning Counselor (CRPC®) 

Connect with us if you want to learn more about a QCD strategy.

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