By John D. Rossi III, CPA
A qualified charitable distribution (QCD) is a direct transfer of funds from your IRA custodian to a qualified charity that lessens your tax burden. With the passage of the Tax Cuts and Job Act of 2017, it appears that fewer people will be itemizing deductions such as charitable giving, so QCDs as a tax management strategy is worth taking a closer look at. To qualify for this type of charitable contribution, you have to pay close attention to a number of rules. See publication 590-B (Distributions from Individual Retirement Arrangements) for additional information.
Most traditional IRAs are eligible for QCD, including rollover or inherited accounts. QCDs cannot be made from employer-sponsored retirement accounts, such as Simple IRAs or SEP IRAs, unless they are inactive. If these or other accounts are active, they must be rolled into a traditional IRA before they qualify. If there is basis in a nondeductible traditional IRA, any QCD would come out of taxable IRA funds first; without this provision, distributions are split proportionately between taxable and nontaxable funds.
In addition to the social benefit of supporting the work of charities, a donated QCD amount is excluded from taxable income. For example, when you take money out of an IRA, it is a taxable transaction. The withdrawal increases your adjusted gross income (AGI). But if you give that same amount to a charity, the gift reduces your taxable income by the amount of the gift, but it does not reduce your AGI. Keeping your AGI lower and within a desired range can affect the phase-outs of certain tax credits and deductions. Because income from a charitable distribution bypasses the 1040, a QCD from your IRA allows you to benefit from charitable giving and, because a QCD is not taxable income, it will not increase your AGI.
A QCD is reported as a normal distribution on IRS Form 1099-R. A QCD can be directly transferred or mailed via check to the qualifying charity or IRA trustee. The IRS indicates that it's acceptable for the IRA custodian to make a check payable to the charitable organization and give the check to the IRA owner who delivers it to the charity. Be careful with this approach: if the check is written to the IRA owner who then writes a check to the charity, the transfer won’t be considered a QCD.
An eligible charity must be a 501(c)(3) organization or house of worship eligible to receive contributions, and must be approved by the IRS. Some charities do not qualify for QCDs, including private foundations, split-interest charitable trusts, and donor-advised funds.
For a QCD to qualify, the IRA owner must be at least age 70 ½ on the date of distribution to the qualified charity, not merely turning 70 ½ sometime that year.
The maximum dollar amount of a QCD is limited to $100,000 per year. This annual limitation is on a per-taxpayer basis (across any/all of the individual’s IRAs). A married couple can each do up to $100,000, as long as each taxpayer’s QCD comes from his or her respective IRA.
To count as a QCD, distributions must meet four specific requirements:
- A QCD must come from a traditional IRA or an inherited IRA.
- The IRA owner must be at least age 70 ½ or older on the date of distribution.
- The distribution must be a transfer to a qualified charity.
- You must receive a confirmation letter from the charity before the tax return is filed. The letter must include a statement that no goods or services were received in exchange for the gift.
QCDs count as IRA distributions, so they can be used to satisfy all or part of your required minimum distribution (RMD) from your IRA. For example, if you have an RMD of $10,000, and you made a $4,000 QCD, you only would have to withdraw another $6,000 to satisfy your RMD. For a QCD to count toward your current year's RMD, the funds must come out of the IRA by your RMD deadline, generally Dec. 31.
To report a QCD on your Form 1040 tax return, you generally report the full amount of the charitable distribution on the line for IRA distributions. On the line for the taxable amount, enter the net amount as taxable and enter "QCD" next to this line. See the Form 1040 instructions for additional information. You must also file Form 8606, Nondeductible IRAs, if you made the QCD from a traditional IRA in which you had basis and received a distribution from the IRA during the same year (other than the QCD), or if the QCD was made from a Roth IRA.
The information contained in this blog is not intended as tax advice and is not a substitute for tax advice. Consult with a tax adviser to determine if making a QCD is appropriate in your situation. If you choose to make a QCD, be sure to save all documentation.
John D. Rossi III, CPA, is an associate professor of accounting at Moravian College in Bethlehem. He can be reached at firstname.lastname@example.org.