Qualified Charitable Distributions or QCDs can be a great way to help reduce your taxable income each year. QCDs are also a great way to meet the demands of your Required Minimum Distributions each year. If you did not know, owners of tax-deferred accounts such as traditional 401(k)'s are required to make mandatory minimum distributions from the account starting in the year they will turn 70.5 years old (if born June 30th, 1949 or before) and 72-year-old (if born after June 30th, 1949). This is the way the government ensures they start receiving some of that money that has been tucked away for decades, tax-free. Upon withdrawal from the account, the money is reported as taxable income on your tax return just like any other income received that year.
A big concern with these RMDs is that they will increase your Modified Adjusted Gross Income high enough that it will raise your premiums for medicare. Take a look at the table below from the Social Security Administration website to see how each increase in MAGI affects the premiums owed.
Monthly Medicare premiums for 2021
The standard Part B premium for 2021 is $148.50. If you’re single and filed an individual tax return, or married and filed a joint tax return, the following chart applies to you:
| Modified Adjusted Gross Income (MAGI) | Part B monthly premium amount | Prescription drug coverage monthly premium amount |
|---|---|---|
| Individuals with a MAGI of less than or equal to $88,000 Married couples with a MAGI of $176,000 or less | 2021 standard premium = $148.50 | Your plan premium |
| Individuals with a MAGI above $88,000 up to $111,000 Married couples with a MAGI above $176,000 up to $222,000 | Standard premium + $59.40 | Your plan premium + $12.30 |
| Individuals with a MAGI above $111,000 up to $138,000 Married couples with a MAGI above $222,000 up to $276,000 | Standard premium + $148.50 | Your plan premium + $31.80 |
| Individuals with a MAGI above $138,000 up to $165,000 Married couples with a MAGI above $276,000 up to $330,000 | Standard premium + $237.60 | Your plan premium + $51.20 |
| Individuals with a MAGI above $165,000 and less than $500,000 Married couples with a MAGI above $330,000 and less than $750,000 | Standard premium + $326.70 | Your plan premium + $70.70 |
| Individuals with a MAGI equal to or above $500,000 Married couples with a MAGI equal to or above $750,000 | Standard premium + $356.40 | Your plan premium + $77.10 |
If you’re married and lived with your spouse at some time during the taxable year, but filed a separate tax return, the following chart applies to you:
| Modified Adjusted Gross Income (MAGI) | Part B monthly premium amount | Prescription drug coverage monthly premium amount |
|---|---|---|
| Individuals with a MAGI of less than or equal to $88,000 | 2021 standard premium = $148.50 | Your plan premium |
| Individuals with a MAGI above $88,000 and less than $412,000 | Standard premium + $326.70 | Your plan premium + $70.70 |
| Individuals with a MAGI equal to or above $412,000 | Standard premium + $356.40 | Your plan premium + $77.10 |
This is where QCDs come into play. A QCD is a direct payment from your IRA to a charity. The charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions. The charitable donation satisfies the RMD rule and it never has to be reported as income on your tax return. This gets rid of the MAGI-increasing issue.
The second benefit of QCDs is they allow you to take better advantage of the new and higher standard deduction amount on your tax return. Back when the standard deduction was around $12,000 for married couples filing jointly, a lot of people found themselves itemizing their deductions instead because they were above the $12,000 standard, this allowed them to get credit for donations. However, now that the standard deduction for married couples filing jointly is $25,900 in 2022 it makes a lot more sense to take the standard deduction rather than itemizing but this means any charitable credits you would receive if you itemized now become worthless. Because your QCDs never make it on your tax return you don't have to worry about those charitable credits becoming worthless if you take the standard deduction, now both the charitable donations and the standard deduction help reduce your taxable income.
A few requirements have to be met in order for you to make a successful QCD.
- You must BE your RMD age for a QCD to satisfy the RMD, remember RMDs become required in the calendar year you will turn 70.5 or 72. QCDs can only begin once you have reached this age.
- The maximum amount that can qualify for a QCD is $100,000 a year per person.
- Your IRA must make the distribution itself, the money cannot flow from the IRA to you to the charity.