Promoting IRA Qualified Charitable Distributions to Your Donors
Posted by Sarah Hopkins on October 08, 2024
The SECURE 2.0 Act has introduced enhancements to IRA Qualified Charitable Distributions (QCDs) that can significantly benefit your nonprofit organization. However, to leverage these advantages, it’s essential that your donors are well-informed. By understanding the new rules and their tax benefits, you can encourage your supporters to contribute more effectively.
Understanding QCDs and RMDs
To begin, let’s clarify what QCDs are. Established in 2006 and made permanent in 2015, QCDs allow taxpayers aged 70½ or older to make direct contributions from their IRAs to qualified charities, up to an annual limit. While a charitable deduction cannot be claimed for a QCD, the amount is excluded from the donor's taxable income. Furthermore, QCDs can satisfy the Required Minimum Distribution (RMD) for IRA owners.
Enhancements from SECURE 2.0
The SECURE 2.0 Act, signed into law in 2022, includes significant improvements to QCDs. Starting in 2024, the previous $100,000 annual distribution limit will be indexed for inflation, increasing to $105,000.
Moreover, SECURE 2.0 introduces a new QCD opportunity beginning this year, allowing taxpayers to make a once-per-lifetime QCD of up to $50,000 (indexed for inflation, or $53,000 in 2024) through a split-interest entity. This encompasses charitable gift annuities, charitable remainder annuity trusts, and charitable remainder unitrusts. These entities enable donors to contribute to your nonprofit while generating an income stream for themselves, with the remaining balance going to your organization after a designated time.
While the amount from a split-interest entity QCD isn’t deductible, it counts toward RMDs and is excluded from the donor's taxable income. Notably, both spouses can contribute to the same split-interest entity, effectively doubling the gift. However, split-interest entities must distribute a minimum fixed percentage of 5% annually for the donor’s or spouse's lifetime, and these payments are taxed as ordinary income.
Strategies to Boost Donations
To effectively inform your donors about QCDs, consider developing a presentation or brochure that outlines how these contributions work and the associated tax advantages. A QCD can be especially appealing for donors who:
- Cannot take advantage of the charitable deduction because their itemized deductions do not exceed the standard deduction for their filing status.
- Wish to give more to charity than their adjusted gross income (AGI) permits due to deduction limits. Generally, cash gift deductions to public charities cannot exceed 60% of AGI, and donations of long-term capital gains property are capped at 30% of AGI.
Beyond the technical aspects, donors are increasingly focused on tangible outcomes. Clearly articulate how their QCDs will be utilized, such as funding a new program, supporting specific projects, or enhancing staff capabilities.
Qualified Recipients
It’s important to note that donor-advised funds, private foundations, and supporting organizations remain ineligible as QCD recipients. Ensure that your nonprofit is authorized to accept QCDs and is prepared to facilitate these contributions. If you need assistance, don’t hesitate to reach out for help.
By effectively communicating the benefits and opportunities associated with IRA Qualified Charitable Distributions, your organization can enhance donor engagement and increase contributions to further your mission.
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Sarah started her career with Lumsden McCormick as a tax intern and now works in the audit and assurance department, where her primary focus is accounting, auditing, and tax matters related to nonprofit organizations and governmental entities. She has significant expertise working with exempt organizations including private and public foundations, primary, secondary, and higher educational institutions, auxiliary organizations, and community colleges in the areas of accounting for and compliance with diversified investment portfolios, tax compliance, and consulting, including unrelated business income and sales tax, information returns, financial reporting, and compliance with Yellow Book and Uniform Guidance.