Year-End Gifting Strategies: Charitable Gifts and Qualified Charitable Distributions

As the year draws to a close, many individuals begin to reflect on their financial decisions and charitable intentions. One effective way to make a meaningful impact while also navigating tax implications is through charitable gifting, mainly using Qualified Charitable Distributions (QCDs) in conjunction with Required Minimum Distributions (RMDs). Let's explore how these strategies work and why they can be a smart move as you approach year-end.

Understanding RMDs and QCDs

Required Minimum Distributions (RMDs)
Once you reach the age of 73, the IRS mandates that you begin taking RMDs from your tax-advantaged retirement accounts, such as traditional IRAs and 401(k)s. These distributions are designed to ensure that retirement funds are eventually taxed. However, RMDs can increase your taxable income, potentially pushing you into a higher tax bracket and affecting other financial aspects, such as Medicare premiums.

Qualified Charitable Distributions (QCDs)
A QCD is a direct transfer of funds from your IRA to a qualified charity. This strategy allows you to satisfy your RMD without increasing your taxable income. For many retirees, this presents a valuable opportunity to give back while managing tax liabilities.

Key Benefits of QCDs

1. Tax-Free Charitable Giving: Directing your RMD to a charity effectively bypasses the income tax typically due on those distributions.

2. Satisfying RMD Requirements: QCDs count toward your RMD, meaning you can fulfill this requirement while supporting causes you care about.

3. Lowering Your Taxable Income: QCDs are excluded from your taxable income, so they can help keep you in a lower tax bracket.

How to Implement This Strategy

Step 1: Confirm Your Eligibility
To utilize a QCD, you must be at least 70½ years old at the time of the gift. The maximum amount each individual can give as a QCD is $100,000 per year. If you're married and both you and your spouse have IRAs, you can each make QCDs, effectively doubling your giving potential.

Step 2: Choose a Qualified Charity
Ensure the organization you wish to support is a qualified 501(c)(3) charity. Not all charities qualify, so it's essential to do your research. If you're unsure, you can verify a charity's status through the IRS website.

Step 3: Initiate the QCD
Contact your IRA custodian to initiate the QCD process. You'll need to specify the amount and the recipient charity. Be sure to retain distribution documentation for your records and tax filings.

According to April Selstad, First Mid Wealth Management Financial Advisor in Charleston, IL, "Many of my clients are committed to donating to their favorite charities or churches each year. However, since the tax changes in 2017, the majority now utilize the Standard Deduction on their tax returns, which means they can no longer deduct their charitable contributions. By using Qualified Charitable Distributions (QCDs) to help meet their Required Minimum Distributions (RMDs), they can continue supporting the causes they care about while effectively reducing their taxable income."

Incorporating charitable giving into your year-end financial strategy can be a win-win, allowing you to fulfill tax obligations while making a positive difference in your community. Whether you're a seasoned donor or exploring philanthropy for the first time, now is the perfect opportunity to make your impact count.

Contact the First Mid Wealth Management Advisor nearest you for personalized advice and to explore estate and charitable giving strategies.

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