One Of The Few Gifts From The IRS
A Qualified Charitable Distribution (QCD), available at age 70 1/2, is one of the best tax gifts that the IRS has given you.
If you are age 72 or older, IRS rules require you to take required minimum distributions (RMDs) each year from your tax-deferred retirement accounts. This additional taxable income may push you into a higher tax bracket and may also reduce your eligibility for certain tax credits and deductions. To eliminate or reduce the impact of RMD income, charitably inclined investors may want to consider making a Qualified Charitable Distribution (QCD).
Tip: To prevent possible claiming issues QCD’s should be completed early in the year and prior to your normal RMD.
A QCD is a direct transfer of funds from an IRA custodian, payable to a qualified charity, as described in the QCD provision in the Internal Revenue Code. Amounts distributed as a QCD can be counted toward satisfying your RMD for the year, up to $100,000, and can also be excluded from your taxable income. This is not the case with a regular withdrawal from an IRA, even if you use the money to make a charitable contribution later. In this scenario, the funds would be counted as taxable income even if you later offset that income with the charitable contribution deduction.
Tip: A QCD is not a tax-deductible charitable contribution; in fact, it is not reportable as taxable at all. The tax benefit is that your IRA distribution, which would ordinarily be 100% taxable, is not reportable as taxable income if it is a QCD. Viewed in the simplest terms: a QCD is effectively 100 percent deductible and does not show up in your income.
Here are 10 things you need to know about QCDs:
1. Tax reform makes QCDs more valuable than ever. You may be one of the many taxpayers now taking the standard deduction, which eliminates your tax deduction for charitable gifts because you will not be itemizing. A QCD is a way to remedy this situation by giving you a tax break for your charitable contributions.
2. A QCD can add to the standard deduction. It allows the donations you made from your IRA to charity to be excluded from your income, lowering your AGI.
3. You can do a QCD if you are an IRA owner or beneficiary and you are 70½ years old or older.
Tip: You don’t have to wait until 72 to use the QCD. Consider starting as soon as you turn 70½.
4. Your QCD must be a direct IRA transfer from the IRA to the charity. You should instruct the IRA custodian to make the distribution check payable to the charity of your choice. If a check that is payable to a charity is sent to you for delivery to the charity, it will be treated as a direct payment. Be careful! If you receive a check payable to you from your IRA and then later give those funds to charity, that is not considered a QCD.
5. You cannot receive anything in return for the donation. No free tickets, tote bags or mugs are allowed. Gifts to donor advised funds, private foundations and supporting organizations, do not qualify as a QCD
6. The per-year limit is $100,000 per person. If you are married, and you and your spouse both qualify, you can each do a QCD of $100,000, for a total of up to $200,000 per year. A tax deduction for the charitable contribution cannot also be taken.
Tip: SECURE Act 2.0 indexes the $100,000 limit beginning in 2023, so the amount may increase each year going forward.
7. The amount transferred from your IRA to charity as a QCD counts toward your RMD.
8. You can do a QCD from your IRA, Roth IRA or inactive SEP or SIMPLE IRA. QCDs are not available from any employer plans. (401k, 403b, etc.)
Tip: Since you cannot utilize a QCD from a 401(k) or other qualified plan, you would have to first perform a rollover to an IRA. Once funds are in an IRA (and assuming you meet the other criteria), you can utilize the QCD technique.
9. QCDs apply only to taxable amounts in your IRA. This is an exception to the pro-rata rule that usually applies to traditional IRA distributions. Only taxable amounts in a Roth IRA will qualify, making QCDs from Roth IRAs rare.
10. Alert your tax preparer that you are doing a QCD. Form 1099-R that the IRA custodian will send to you will not have any information indicating that a QCD has been done for the year. That means that it could easily be missed by your tax preparer. Avoid this mistake by being sure your tax preparer is aware of the transaction. You should keep an acknowledgement of the donation from the charity for your tax records.
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This information is not intended to be a substitute for specific individualized tax advice.
We suggest that you discuss your specific tax issues with a qualified tax advisor.
