This Charitable Giving Strategy ‘Almost Always’ Provides The Biggest Tax Break, Advisor Says
If you’re retired and planning a year-end donation to charity, there’s a key move to maximize your tax break, financial experts say.
Qualified charitable distributions, or QCDs, are direct transfers from an individual retirement account to a non-profit organization. Additionally, retirees can give more in 2024, according to the IRS.
“The strategy almost always has the highest tax advantage, compared to other giving options,” said certified financial planner Sandi Weaver, owner of Weaver Financial in Mission, Kansas, and who is also a certified public accountant.
You must be age 70½ or older to qualify for a QCD. If eligible, you can transfer up to $105,000 tax-free from a pre-tax IRA in 2024, up from $100,000 in past years, thanks to changes enacted via Secure 2.0. In 2025, the limit will increase to $108,000, according to the IRS.
QCD Tax Break Is ‘Better Than A Deduction’
When filing taxes, you must claim the standard deduction or your total itemized deductions, including charitable gifts, whichever is greater.
With a higher standard deduction since 2018, only about 10% of filers itemized in 2021, according to the latest IRS data. That means most filers don’t claim the charitable deduction.
“While there’s no tax deduction for a QCD, the amount distributed is excluded from income, which is better than a deduction,” said CFP Juan Ros, a partner at Forum Financial Management in Thousand Oaks, California. If you’re eligible, charitable giving should happen via QCD first.”
One of the key benefits of QCDs is the transfers won’t increase your adjusted gross income, experts say.
“Higher AGI can trigger income-related monthly adjustment amounts, or IRMAA, for Medicare Part B and Part D premiums,” Weaver explained.
For 2024, retirees can expect higher premiums once modified adjusted gross income, or MAGI, exceeds $103,000 for single filers or $206,000 for married couples filing together. There’s a two-year lookback, meaning 2024 premiums are based on MAGI from your 2022 tax return.
Satisfy Your Required Minimum Distribution
“Another benefit of QCDs is the transfer can offset your annual required minimum distribution, or RMD, which helps reduce your AGI,” according to Ros.
Pre-tax IRA balances have grown in 2024 amid stock market highs, which can mean higher RMDs for some retirees. The average IRA balance was $129,200 as of June 30, up 14% from the previous year, according to a Fidelity report based on 5.8 million IRA accounts. Since 2023, most retirees must take RMDs from pre-tax retirement accounts starting at age 73.
Source: NBC4 Los Angeles News
