Qualified Charitable Question

[marko]

I'm sure this is easy...

So I was reading Kiplinger's about charitable donations.

They say: "...In 2024 you can transfer up to $105,000 from your IRA to qualified charities. The contribution is not deductible but it will reduce your AGI...."

Can someone explain how "not deductible" reduces the AGI?

 

[braumeister]

It doesn't count in your AGI, so different from any other distribution from a Traditional IRA. It's not deductible, because that would give you a double benefit.

 

[GrayHare]

sounds like they are describing a QCD, which is not a deduction technically, but instead a tIRA withdrawal that is not subject to tax

 

[The Rodent]

It's not deductible as a separate charitable itemized deduction.


Your 1099-R will show the entire distribution amount including the amount you have designated as a QCD. This is the amount reported on line 4a (IRA Distributions) of your IRS form 1040. On line 4b it's up to you do report the "taxable amount" of the IRA distribution. This would be the 1099-R amount less the QCD. In my case TurboTax automatically placed a note "QCD" alongside the line 4b amount that I entered. This is how your AGI gets reduced by the QCD amount.

The lower AGI also applies to your state taxes. No need to claim a separate charitable deduction on your state taxes. No double dipping.

 

[TheWizard]

But hold on.
You can do QCDs starting age 70.5 whereas younger folks don't start RMDs until age 73 or 75.

So in those early years, you can do QCDs and there will be zero impact on your tax return.

But after you are subject to RMDs, the situation is different..

 

[TheWizard]

And....you need to be age 70.5 as of the date of your QCD, though if you're a few months younger, the IRS might not be able to tell without doing an audit...

 

[The Rodent]

But hold on.
You can do QCDs starting age 70.5 whereas younger folks don't start RMDs until age 73 or 75.

So in those early years, you can do QCDs and there will be zero impact on your tax return.

But after you are subject to RMDs, the situation is different..

You can make a QCD before you need to take RMD's and it will still reduce your AGI.
If you make a QCD AND you are subject to RMD's it will reduce your AGI AND the QCD will still count toward your RMD

 

[TheWizard]

You can make a QCD before you need to take RMD's and it will still reduce your AGI.
If you make a QCD AND you are subject to RMD's it will reduce your AGI AND the QCD will still count toward your RMD

Not necessarily.
Someone age 71 could just donate $1000 from his checking account and get a nice deduction.
Doing a $1000 QCD at age 71 won't impact his taxes at all, but will reduce his IRA balance a bit...

 

[Gumby]

Not necessarily.
Someone age 71 could just donate $1000 from his checking account and get a nice deduction.....

Only if he itemizes. If you take the standard deduction, it would be better to use a QCD so you can reduce the size of your IRA balance subject to RMDs.

 

[audreyh1]

Only if he itemizes. If you take the standard deduction, it would be better to use a QCD so you can reduce the size of your IRA balance subject to RMDs.

+1

 

[TheWizard]

Only if he itemizes. If you take the standard deduction, it would be better to use a QCD so you can reduce the size of your IRA balance subject to RMDs.

Correct.
And coming soon, we may have a return to mostly unlimited SALT deductions so folks like me will be better off itemizing again.

But now that I'm old, I'll be doing QCDs for the most part, to control my Medicare MAGI...

 

[marko]

OP here. So a regular IRA withdrawal goes on your AGI, but a QCD contribution doesn't, but you pay no tax on that donation/withdrawal. Is that it?

So the only/main benefit is that you lower your IRA balance tax free while providing to a charity.?

 

[audreyh1]

Because a QCD doesn’t show up on your AGI you pay no tax on it.

 

[TheWizard]

OP here. So a regular IRA withdrawal goes on your AGI, but a QCD contribution doesn't, but you pay no tax on that donation/withdrawal. Is that it?

So the only/main benefit is that you lower your IRA balance tax free while providing to a charity.?

Plus, if you're old enough for RMDs, QCDs count toward that if you do them properly...

 

[Route246]

I had this same question. I was also baffled.

It is all about IRMAA which is evil for people having high AGI in retirement. See this article snippet:

What is an IRMAA?
People with Medicare who earn a high income have to pay an IRMAA, an extra charge on Medicare Parts B and D. The fee kicks in if you make more than $97,000 (going up to $103,000 in 2024) or if you and your spouse collectively earn over $194,000 (going up to $206,000 in 2024).

The IRMAA is calculated on a sliding scale with five income brackets topping out at $500,000 and $750,000 for individual and joint filing, respectively. These figures change annually with inflation.

Basically, if you "write off" a charitable contribution your AGI is still intact and you may be "bumped" into a higher tier. Key point is that this is all calculated before your charitable contribution is deducted. A QCD is a direct charitable contribution and does not affect your AGI and is not deducted for the sake of taxes owed. Basically, if you took the tIRA $105K income and then wrote off $105K you're still vulnerable to get bumped into a higher tier for Medicare calculations.

I'm sure this is easy...

So I was reading Kiplinger's about charitable donations.

They say: "...In 2024 you can transfer up to $105,000 from your IRA to qualified charities. The contribution is not deductible but it will reduce your AGI...."

Can someone explain how "not deductible" reduces the AGI?

 

[cathy63]

Correct.
And coming soon, we may have a return to mostly unlimited SALT deductions so folks like me will be better off itemizing again.

But now that I'm old, I'll be doing QCDs for the most part, to control my Medicare MAGI...

Even if the SALT limit goes away, I don't think there are any cases where it would be better to itemize a charitable contribution than do a QCD. I'd be interested to know if anyone else can think of a case where your taxes would be lower if you took the deduction instead.

Using a QCD:
- less of your Social Security may be taxable
- you're less likely to be subject to IRMAA in future years
- less of your investment income is subject to NIIT
- if you do itemize, more of your medical and misc expenses (assuming they're allowed again) will be deductible
- you may be able to take advantage of credits that phase out at higher AGIs
- you may be able to avoid AMT
- QCD limit is independent of the 60% of AGI charitable limit, so you can give the full QCD and also give up to 60% of remaining AGI

 

[RunningBum]

Long term isn't it possible that donating highly appreciated assets could come out better than QCDs?

The main assumptions are that you have enough deductions already to get a full deduction on the contribution, and that you otherwise would eventually sell the assets rather than die with them, letting your heir get stepped up basis. Or if stepped up basis on death goes away.

It would also help if your AGI isn't so high to hit IRMAA or any other higher income triggers.

I don't think this is too far-fetched of an example. It could be my situation, except I don't know that I'll be selling those highly appreciated holdings.

 

[marko]

Let me pose this another way: if you were not planning to make a charitable donation, making one through a QCD doesn't change your AGI. Correct?

The only savings is if you were to withdraw directly from your IRA and then make the donation and take the write off. QCD is more staitforward.

No contribution at all: AGI is X
Contribution via QCD: AGI is still X

 

[OldShooter]

Cutting through the alphabet soup I think donating via QCD is always neutral or better. No downside. Schwab gives us QCD check blanks, so no more hassle than any other check.

 

[jebmke]

Cutting through the alphabet soup I think donating via QCD is always neutral or better. No downside. Schwab gives us QCD check blanks, so no more hassle than any other check.

I would say almost always. We are using taxable DAF donations until RMDs start because I can lower our overall tax that way. The RMDs will all go to charity either way so between now and RMD time I can deduct the taxable assets I flush.

QCDs do have some limitations that are not financial but in some cases, there may be workarounds.

 

[audreyh1]

Let me pose this another way: if you were not planning to make a charitable donation, making one through a QCD doesn't change your AGI. Correct?

The only savings is if you were to withdraw directly from your IRA and then make the donation and take the write off. QCD is more staitforward.

No contribution at all: AGI is X
Contribution via QCD: AGI is still X

There are two things important here:

If you are subject to RMDs, then the QCD reduces the amount you have to take out satisfy your RMD. In this case it does reduce your AGI which would otherwise include the entire RMD amount.

If you are not subject to RMDs then your AGI does not change, but you have reduced the size of your IRA which will theoretically reduce future RMD amounts.

You can always meet your RMD via QCDs and even go beyond. It won’t reduce your potential AGI more than the RMD amount but it will reduce your IRA.

 

[RunningBum]

A non-monetary downside to QCDs over using a DAF is that (I believe) your identify is visible with the donation. Don't you have to get a letter back from them to complete the QCD process? With a DAF I can and have made donations anonymously, so my info isn't shared with other charities.

 

[jebmke]

A non-monetary downside to QCDs over using a DAF is that (I believe) your identify is visible with the donation. Don't you have to get a letter back from them to complete the QCD process? With a DAF I can and have made donations anonymously, so my info isn't shared with other charities.

That is right; we do most of the larger ones that are local anonymously through our donor fund.

One option I need to look into is our local community foundation. They provide a lot of support to most of the local organizations we support. One option may be to simply do a mega QCD to the foundation and continue to use the DAF for other organizations that are not routinely supported by the foundation.

 

[audreyh1]

A non-monetary downside to QCDs over using a DAF is that (I believe) your identify is visible with the donation. Don't you have to get a letter back from them to complete the QCD process? With a DAF I can and have made donations anonymously, so my info isn't shared with other charities.

Yes, you can’t be anonymous.

 

[marko]

There are two things important here:

If you are subject to RMDs, then the QCD reduces the amount you have to take out satisfy your RMD. In this case it does reduce your AGI which would otherwise include the entire RMD amount.

If you are not subject to RMDs then your AGI does not change, but you have reduced the size of your IRA which will theoretically reduce future RMD amounts.

You can always meet your RMD via QCDs and even go beyond. It won’t reduce your potential AGI more than the RMD amount but it will reduce your IRA.

Got it! Thanks to everyone!