November 20, 2023
As the end of the year approaches, many executives and high-net-worth individuals are focused on tax-saving strategies. While there are several options available, depending on specific circumstances, making qualified charitable distributions (QCDs) can easily reduce taxable income. Taxpayers who must take required minimum distributions (RMDs) have the option to give up to $100,000 in tax-free gifts to an eligible charity. Payment is facilitated through the transfer of funds from the plan administrator directly to the eligible charity. Using QCDs allows an individual to offset the tax burden arising from RMDs while giving to a worthy cause. This is a powerful method for reducing tax liability at year end. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.
RMDs, or Required Minimum Distributions, are mandatory withdrawals that individuals with certain types of tax-advantaged retirement accounts, such as Traditional IRAs (Individual Retirement Accounts) and employer-sponsored retirement plans like 401(k)s, must start taking after reaching a certain age. RMDs are required to ensure that individuals use the funds in these accounts for retirement income and do not indefinitely defer paying taxes on the money.
Account owners can delay taking RMDs if participating in a workplace retirement plan, such as 401(k) or a profit-sharing plan, until the year of retirement. There is an exception for those who are at least a 5% owner of the business sponsoring the retirement plan.
Moving forward, Roth IRAs are also exempt from RMD rules. For the years 2022 and 2023, taxpayers will have to take RMDs from designated Roth accounts that are part of 401(k) or 403(b) plans. Starting in 2024 and beyond, these distributions will not be required.
Qualified charitable distributions (QCDs) offer an alternative to individuals who must take RMDs. With a QCD, taxpayers can transfer funds to a qualified charity directly. If certain guidelines are followed, QCDs can help individuals satisfy RMD requirements and exclude contributions from taxable income.
As the year comes to a close and interest in year-end tax planning arises, individual retirement account (IRA) owners should note those who are 70 1/2 or older, are able to transfer up to $100,000 to an eligible charity tax-free. Married couples that are 70 1/2 or older at the time of distribution, if they both have IRAs, can exclude up to $100,000 each, or $200,000 total per year in QCDs.
To be eligible, the charity needs to be a 501(c)(3) organization that can receive tax-deductible contributions, the distribution must come directly from the trustee of the IRA to the charity, and the IRA owner must be age 70 1/2 or older. Electronic payments or checks made out to the IRA owner and then sent to the charity will not count. Private foundations, donor-advised funds, and supporting organizations do not count as eligible charities. However, QCDs can be used to fund a Charitable Gift Annuity, Charitable Remainder Unitrust, or Charitable Remainder Annuity Trust up to a $50,000 one-time amount.
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There are many year-end tax planning moves that individuals can make at year-end. However, QCDs are an excellent way to reduce taxable income. If you have questions about the information outlined above or need assistance with an accounting or tax issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.