What is a Qualified Charitable Distribution?
According to the IRS, a Qualified Charitable Distribution (QCD) is an otherwise taxable distribution from an IRA, except for an ongoing SEP or SIMPLE (IRA), owned by an individual who is age 70 ½ or over that is paid directly from the IRA to a qualified charity. Distributions from IRA accounts made to directly to qualifying charities are NOT reported as taxable income.
Individuals must be at least age 70 ½ to make a QCD and the distributions must be made from amounts that would otherwise be taxed as ordinary income. For example, non-deductible contribution amounts would not be eligible for the distribution.
Am I eligible to make a QCD?
What accounts can I use to make QCDs?
Traditional IRA
Inherited IRA
SEP IRA
SIMPLE IRA
Roth IRA (while a QCD is technically allowed to be made from a Roth IRA, we have yet to run into a scenario where it would make sense to gift directly from this retirement vehicle)
Qualified retirement plans such as 401k and 403b accounts are NOT eligible for a QCD. In many cases, it could make sense to roll funds into an IRA from the qualified retirement plan to then make the dollars “eligible” for the QCD.
Individuals age 70 ½ or older can make qualified charitable contributions up to the annual limit of $100,000 per person (meaning a married couple could donate up to $200,000). This limit applies to the sum total of distributions within a calendar year, regardless of whether distributions are made to one or more charities.
How much can give each year from my IRA?
How do I actually facilitate a QCD?
How you actually process a QCD is extremely important. Funds MUST go directly from your IRA to the charity of your choice, no exceptions. If you send dollars from your IRA to your checking account and then cut a check from your checking account to the charity, the QCD will be disallowed.
Do I have to itemize deductions to make a QCD?
No, you do not have to itemize deductions in order to make a QCD since you are not actually taking a deduction on the amount of your QCD. These distributions are reported by your IRA custodian as a normal distribution. When filing your tax return, you report the amount of your QCDs as not taxable, thereby excluding it from your total gross income.
If you do itemize your deductions, you cannot then claim the amount of the QCD as a deduction, as your charitable distribution has already been excluded from your taxable income. (Sorry, no double counting!)
Making a charitable donation directly from an IRA distribution provides the potential benefit of excluding from your gross income that distribution amount that would otherwise add to your taxable income. As an example, let’s say Mrs. Smith is 73 and must begin taking her Required Minimum Distribution (RMD) from her IRA that would be fully taxable. Rather than taking this as a normal distribution, she donates that amount to her favorite qualified charity directly from her IRA. Mrs. Smith is able to satisfy her RMD for that year and the amount of that distribution does not count as part of her taxable income. This is particularly useful for individuals that don’t itemize deductions in a given tax year and therefore do not receive a tax benefit from making charitable donations out-of-pocket.
To learn more about how the new tax law changes in 2018 could affect your planned giving through QCDs, click here.
Why should I make charitable gifts using a QCD?
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.