Independent schools play a vital role in educating our future generations, providing first-class educational experiences that nurture the bright minds of tomorrow. But the educational aims of an independent school don’t necessarily start and end in the classroom: often, educating donors on tax-efficient giving strategies can yield valuable new fundraising opportunities.
Qualified Charitable Distributions (QCD) are one of those strategies. When donors contribute through a Qualified Charitable Distribution, they’re able to obtain significant tax benefits while supporting causes they’re passionate about.
For independent schools, educating certain donors about the potential tax savings that Qualified Charitable Distributions result in represents an opportunity to improve the performance of their development efforts, unlocking the ability to channel more funds toward the mission of the school.
In this guide, we share some of the key concepts that independent school leaders and fundraising teams should be aware of before soliciting qualified charitable distributions from donors.
Smith + Howard’s dedicated team of independent school accounting and tax professionals brings significant experience advising schools on a variety of audit, advisory, and tax matters. Contact an advisor today to learn more.
When an individual reaches the retirement age, which is currently set at 72 years old (or 73 if they reach 72 after 12/31/2022), they are required to take Required Minimum Distributions from their taxable IRA accounts. These distributions are considered ordinary income and are taxed as such.
Many individuals elect to make Qualified Charitable Distributions in place of some or all of their Required Minimum Distributions. A Qualified Charitable Distribution, commonly referred to as a QCD, is a contribution that an individual makes to a 501(c)(3) organization directly from their IRA account.
These distributions allow individuals to reduce their taxable income while supporting causes they’re passionate about. Qualified Charitable Distributions are capped at $100,000 annually in 2023, although this will rise in line with inflation in 2024.
Donating via a QCD offers donors significant tax benefits – regardless of their level of wealth. The majority of taxpayers take the standard deduction, which is currently set at $15,700 for single filers over the age of 65, and $30,700 for a married couple filing jointly where both spouses are over 65. When taxpayers take the standard deduction, they cannot itemize their charitable contributions and therefore don’t receive any tax benefit.
Qualified Charitable Distributions are not included in the standardized deduction. Instead, per current tax law, making a QCD lowers a taxpayer’s Adjusted Gross Income (AGI) by the amount of their QCD, decreasing that individual’s taxable income. Regardless of whether an individual makes a QCD of $1,000 or $100,000, there is a clear tax benefit.
QCDs are also more straightforward from a tax compliance perspective, provided the individual follows the regulations and instructs their IRA administrator to make a QCD on their behalf to a registered 501(c)(3) organization. Donations of cash or assets trigger a variety of filing requirements that include complex calculations. With a QCD, all a donor needs is a simple letter of thanks from the organization they supported.
It’s worth noting that each state treated QCDs differently. Some states follow federal regulations, allowing taxpayers to deduct QCDs from their taxable income, whereas others do not allow this and require taxpayers to add any distributions back to their taxable income at the state level.
In 2023, a new provision allows taxpayers to make a one-time QCD to establish a Charitable Remainder Trust. This trust can be designed to provide funding to an independent school, but donors should be aware that they will incur additional compliance costs as a result of the legal and tax filing requirements created by the trust.
Related: When or Why Should You Use a Trust?
Due to the tax benefits outlined above, a QCD is an attractive way for a donor to provide financial support to independent schools. Fundraising teams and school leaders don’t need to know the intricacies of tax law, but understanding the broad themes outlined above and being able to communicate them to donors can significantly enhance the effectiveness of your fundraising efforts.
Only donors above 70 ½ years of age are eligible to make QCDs. For long-established schools, there may be many alumni in this age range, whereas for newer schools, grandparents of current students may be the primary focus.
Instruct your fundraising professionals to consider raising the topic of Qualified Charitable Distributions in their conversations with qualified donors. This is a tax planning strategy that many donors may be unaware of, but it often results in a win-win situation: a reduction in taxable income for the donor and an increase in donations for the school.
At Smith + Howard, we’re proud to serve as a trusted partner to independent schools across the nation. It’s our role to enable schools to be successful and to that end, our independent school accounting and tax team invests significant time and resources in creating educational materials around strategies to strengthen your school’s financial standing.
We host frequent online seminars and in-person events for independent schools, combined with a range of advisory services provided by our experienced professionals. To learn more about Smith + Howard’s services for independent schools, contact an advisor today.
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