Xavierarnau | E+ | Getty Images
If you are retired and planning a year-end donation to charitythere is a key movement towards maximize your tax reliefsay financial experts.
Qualified charitable distributionsor QCD, are direct transfers from an individual retirement account to a non-profit organization. Additionally, retirees can give more in 2024according to the IRS.
The strategy “almost always has the highest tax benefit,” compared to other giving options, said certified financial planner Sandi Weaver, owner of Weaver Financial in Mission, Kansas. She is also a chartered accountant.
You must be 70 ½ years or older to qualify for a QCD. If you are eligible, you can transfer up to $105,000 tax-free on a pre-tax IRA in 2024, up from $100,000 in previous years, thanks to changes passed through 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 your taxes, you must claim the standard deduction or the total of your itemized deductions, including charitable donations, whichever is greater.
With a higher standard deduction since 2018, only about 10% of tax filers detailed in 2021, according to the latest IRS data. This means that most tax filers do not claim the charitable deduction.
Although there is no tax deduction for a QCD, “the amount distributed is excluded from income, which is better than a deduction,” said CFP Juan Ros, partner at Forum Financial Management in Thousand Oaks, in California.
If you’re eligible, charitable donations should first be made through QCD, he said.
One of the main advantages of QCDs is that the transfers will not increase your adjusted gross income, according to experts.
A higher AGI may 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 singles or $206,000 for married couples filing jointly.
There is a two-year lookback, meaning 2024 bonuses are based on the MAGI from your 2022 tax return.
Meet your required minimum distribution
Another advantage of QCDs is that the transfer can compensate your minimum required distributionor RMD, which helps reduce your AGI, according to Ros.
Pre-tax IRA balances increased in 2024 amid stock market highs, which may mean higher RMDs for some retirees. THE average IRA balance stood at $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 withdraw RMDs from retirement accounts before taxes starting at age 73.
