Year-End Charitable-Giving Strategies

Key Takeaways

• Qualified charitable distributions only apply to IRA owners and IRA beneficiaries who are 70.5 years old or older. A QCD is a way to make your charitable contributions. You’re allowed to make your gift directly from your IRA, a direct transfer from your IRA to a designated charity. It’s limited to $100,000 per year per IRA owner.
• Congress increased the age to 73 when RMDs, required minimum distributions, must begin, and they left the QCD, qualified charitable distribution, age at 70.5.
• Under the QCD, you can have charitable gift annuity, CGAs. You can do up to $50,000 as a QCD where you send money through a charitable gift annuity, same thing to a charity, but you get some income back.

Christine Benz: Hi, I am Christine Benz from Morningstar. We’re in the fourth quarter, and that means that it’s time to get on the stick if you want to make charitable gifts and have them count on your 2023 tax return. Joining me to discuss some charitable giving strategies for 2023 is tax and retirement planning expert, Ed Slott.

Ed, thank you so much for being here.

Ed Slott: Great to be back here. Thanks, Christine.

Charitable Giving Strategies and Qualified Charitable Distributions

Benz: It’s great to have you here. So, we want to talk about charitable giving strategies as 2023 winds down. Top of the charts for charitable giving, I think, is this qualified charitable distribution. Let’s talk about that. Who can use it and what the benefits are?

Slott: QCDs, qualified charitable distributions: This is one of the best provisions in the tax code. The only unfortunate part, it doesn’t apply to enough people. It only applies to IRA owners and IRA beneficiaries who are 70.5 years old or older. And what a QCD is, it’s a way to make your charitable contributions. Remember, ever since the Tax Cuts and Jobs Act expanded the standard deduction, now, according to IRS statistics, 90% of the taxpayers take a standard deduction because it’s so high and they also knocked out a lot of itemized deductions. So, while you’ve been giving to charity, that’s nice, but you haven’t been getting the tax benefits. This is a way to give like you were doing before to charity and get tax benefits and better benefits than you had before. When you took an itemized deduction, that was a deduction after what we call adjusted gross income. But the QCD is an exclusion from income. So, it hits before your adjusted gross income.

So, the way it works: You’re allowed to make your gift directly from your IRA, a direct transfer from your IRA to a designated charity. And normally, when you take money out of your IRA, that’s taxable, but this is not. So, you’re getting money out of your IRA essentially at 0% tax rates. So, you’re getting and reducing your AGI from what it would have been if that IRA distribution was included in income, and you’re still fulfilling your charitable goals. That’s why the IRAs are the best assets to give to charity. No question about it. They’re loaded with tax. If you can get it out through a QCD at 0% and give the same amount you were giving to charity and get a tax benefit, it’s great.

Just a few words about charitable planning before we go on. People like tax benefits, but that’s not why you should be doing it. That’s just the cream. The reason you give to charity is because you want to give to charity. The tax benefits only work if you’re charitably inclined. In other words, you’re going to give anyway, but if you give it a different way, you get tax benefits because, in the end, you’re still giving the asset away. So, it’s not a good tax move. It’s just that there’s tax benefits if you’re giving anyway. So, I always tell people when it comes to charity, it only works if you’re truly charitably inclined and you want to give.

QCDs and RMDs

Benz: Let’s discuss the interplay between this qualified charitable distribution and required minimum distributions. There’s a disconnect agewise, 70.5 for the QCDs, 73 now for required minimum distributions. But let’s talk about how those two things can work together for people who are subject to RMDs.

Slott: Right. So, even though they change—Congress—increased the age to 73 when RMDs, required minimum distributions, must begin, they left the QCD, qualified charitable distribution, age at 70.5. So, you can actually do it even before your RMDs kick in. And again, if you normally give to charity, this is a great way to do it if you qualify, IRA owners or beneficiaries only, if you’re 70.5. Doesn’t work from a 401(k). But once you’re subject to RMDs, the benefits are even better because if you take the QCD, it can offset your RMD. So many acronyms here. It can offset your RMD. For example, if your RMD is $5,000, but you give $5,000 to the charity, you transfer, direct transfer from your IRA to the charity, it satisfies your RMD, but it’s not included in income.

Benz: What kind of documentation do people need to have to show that they’ve made this QCD?

Slott: You need the same documentation you would for an itemized deduction. You need what’s called a CWA letter, Contemporaneous Written Acknowledgement. That’s the letter that almost every charity sends out when you give, whether you can deduct it or not, and they say, “We got this, and no goods or services were received.” And that’s important for a QCD because you can’t get anything back. That’s one of the conditions. You can’t give to a charity and expect something back. That would knock out the QCD. And it’s more severe if you do it—the loss is more severe with a QCD because if you add an itemized deduction, not the QCD—let’s say you gave $10,000 to some organization, and they gave your show tickets worth $200. All right, so you’d have a $9,800 net deduction. If you did that with a QCD, you lose the whole $10,000. So, it’s more severe with a QCD.

Charitable Giving Under 70.5

Benz: QCD, as you’ve said, only applies to people who are 70.5 and over. I’d like to touch on charitable giving strategies for people who are younger than 70.5. It seems like a main one would be to look in your taxable portfolio and see if you have potentially appreciated assets that you could either give directly to charity or maybe to a donor-advised fund. Can you talk about that?

Slott: Back on the QCD first, I did mention it’s limited to $100,000 per year per IRA owner. And that’s going to be indexed for inflation next year, which I think—I said this at a meeting once, and I got all kinds of pushback—I said, “I think that’s enough for most people.” “Oh, no, I have people that give more.” All right. Well, I still think it’s a pretty good number, $100,000 per person.

Benz: Definitely.

Slott: Not everybody can do it, as you said. So, are there other alternatives, if you’re charitable inclined and you want to give money away? There’s a new item, too, for this year. Under the QCD, you can—I hate to throw in another acronym—charitable gift annuity, CGAs. You can do up to $50,000 as a QCD, where you send money through a charitable gift annuity, same thing to a charity, but you get some income back.

All right. Now to people—and that’s new under Secure 2.0—and that’s $50,000 lifetime, not each year like the QCD. So, one shot. A lot of charities lobbied for that. So, they got that. Donor-advised funds still do not qualify for QCDs as well.

But let’s go to people that want to give to charity and get tax benefits. Let’s say they can’t do a QCD. They have IRA, but they’re too young. You talked about appreciated securities. That’s one way to do it. You can do that. And if you’re young, maybe it pays. The idea is if you sold the stock, you would have a capital gain. But if you give it to the charity, you’re relieved to that capital gain, and you get a deduction for the full fair market value. You just have to watch it. These have to be large enough sums to qualify for itemizing. If you look at it, people say 65 or over that qualify for the extra standard deduction. A married couple, if they were both 65 or over, would have a standard deduction of $30,700. That’s what they get anyway. So, you’d have to give a lot to charity to trigger an eligibility for an itemized deduction along with your other itemized deductions to be over that amount. So, that’s what you’d have to look at. Am I going to do all this and not get the deduction anyway and get stuck with the standard deduction? But that’s one way to do it. Or bunching charitable contributions. Bunching them. In other words, let’s say, you were going to make—you can do that with donor-advised funds, or you were going to make donations for five years—do them all this year if you have the funds. The point is you have to beef up enough to get the tax benefit to get over the benefit beyond the standard deduction.

Benz: Ed, always great to get your thoughts on these tax concepts, especially in relation to charitable giving. Thank you so much for being here.

Slott: All right. Thanks, Christine.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.

Watch “5 Money Mistakes to Avoid in Q4 2023″ for more from Christine Benz.