IRA Holders Can Contribute $105,000 Tax-Free to Charities: IRS

The IRS in Washington, on Aug. 12, 2024. Madalina Vasiliu/The Epoch Times

Owners of individual retirement accounts (IRAs) can give more toward charities tax-free this year but must make such donations before the end of 2024, according to a recent reminder from the IRS.

IRA owners aged 70 1/2 and older “can make up to $105,000 in tax-free charitable donations during 2024 through qualified charitable distributions (QCD). That’s up from $100,000 in past years,” a Nov. 14 IRS statement said. QCDs are distributions made from an IRA account to qualified charities. For those aged 73 and older, QCDs also count toward the annual required minimum distributions (RMDs) they’re expected to make. For married couples with separate IRAs, donations can go up to $210,000.

“Generally, IRA distributions are taxable, but QCDs remain tax-free if sent directly to a qualified charity by the trustee. To make a QCD for 2024, IRA owners should contact their IRA trustee soon to ensure the transaction completes by year-end,” the IRS said.

Beginning this year, the QCD limit will be adjusted annually based on inflation. For 2025, the threshold will rise to $108,000.

For 2024, taxpayers should report QCDs on their tax returns. The amount of any IRA distribution must be mentioned on line 4a of Form 1040. If the full distribution is a QCD, taxpayers must write “0” on line 4b.

Starting in early 2025, IRA trustees will issue Form 1099-R—which covers distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance contracts, and so on—documenting all distributions made into an IRA account.

Taxpayers who made QCDs must “obtain a written acknowledgement from the charity showing the contribution date, amount, and confirmation that no goods or services were received,” the agency said.

IRS pointed out that QCDs must be made directly by the trustee of the IRA to the charity. Such transfers cannot go through the taxpayer. So, funds transferred to an individual from their IRA accounts for charitable distributions would not be counted as a QCDs.

Financial services company Charles Schwab points out that taking the full RMD and then donating it could end up resulting in a higher tax bill than if the amount were given through a QCD.

For instance, if a taxpayer’s annual income and RMD totals $160,000 and the person gives $35,000 from their RMD to charity, the pretax income will still be $160,000, it noted.

However, if the $35,000 is transferred directly from an IRA account, it would be deducted from the $160,000 income, which would leave the person with a lower pretax income of $125,000.

QCDs

QCDs can only be made to qualified charitable organizations as defined in the tax code. At present, such distributions cannot be made to donor-advised fund (DAF) sponsors, which are tax-exempt charitable organizations managing donor-advised funds. DAFs are private funds created to manage donations on behalf of an organization, family, or individual.

Similarly, QCDs cannot be made to private foundations. Fidelity advises donors to ensure that the organization they donate to is qualified.

“Donors cannot receive any benefit for making a qualified distribution to a charity,” according to Fidelity. “So, for example, a QCD cannot be used to purchase something in a charity auction or purchase tickets for a charity golf tournament.

“State tax rules on QCDs vary, so donors using charitable distributions should consult a tax advisor to understand the impact on state tax liabilities.”

There are certain situations when QCDs make financial sense for individuals. For instance, if the person has an RMD and would face substantial tax liability from making such distributions but does not need the funds, then a QCD is a better option.

Some individuals may want to lower the balance of an IRA account to reduce future minimum distributions. A QCD can help achieve this objective.

There are occasions when QCDs may not be the best choice.

“For example, if you have securities that have grown in value since you bought them, it may make more sense and provide greater tax benefit to donate them to charity instead of taking a QCD,” Fidelity notes.

“Additionally, if you prefer to take a tax deduction in the current year and then support charities over time, as you can when you contribute to a donor-advised fund, a QCD may not be the right option.”