Qualified Charitable Distributions: A Smarter Way To Give
When planning your IRA withdrawal strategy and any Required Minimum Distributions (RMDs) for the current tax year, you may want to consider making any regularly planned charitable donations through a Qualified Charitable Distribution (QCD). QCDs are particularly appealing as an alternative to cash (writing a check) donations to qualified charities.
A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. If you have check writing privileges on your IRA, then you can write a check made payable directly to the charity and simply give it to them. If you don’t have check writing privileges on your IRA, then you can submit a distribution request form to the custodian, and as long as the check is made payable directly to the charity, then it can be mailed either to you (to give to the charity) or directly to the charity itself.
In addition to the benefits of giving to charity, a QCD is excluded from your taxable income, unlike regular withdrawals from an IRA (i.e., RMDs), which are taxable and increase your adjusted gross income (AGI). This is important because itemized deduction phase-outs, exemption phase-outs, Roth contribution eligibility, the net investment income Medicare surtax, the income related adjustments for Medicare Part B & D premiums, the taxability of Social Security income, and some credit phase-outs all factor off your AGI.
Furthermore, giving a QCD directly from your IRA can allow you to benefit from charitable giving even if you don’t normally itemize deductions and take the standard deduction instead. You can’t take a charitable deduction unless you itemize, so giving directly from your IRA allows you to ignore your QCD IRA distribution when calculating your taxable income and still take the standard deduction. This may or may not become more relevant next year depending on proposed changes to the tax code.
Importantly, QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, as long as certain rules are met.
Can I make a QCD?
While many IRAs are eligible for QCDs—Traditional, Rollover, Inherited, SEP (inactive plans only), and SIMPLE (inactive plans only)1 —there are requirements:
- You must already be 70½ or older on the date of distribution to be eligible to make a QCD.
- QCDs are limited to the amount that would otherwise be taxed as ordinary income. This excludes non-deductible (after-tax) contributions, which will otherwise qualify for a charitable deduction. 2
- The maximum annual amount that can qualify for a QCD is $100,000. This applies to the sum of QCDs made to one or more charities in a calendar year. (If, however, you file taxes jointly, your spouse can also make a QCD from his or her own IRA within the same tax year for up to $100,000.)
- For a QCD to count towards your current year’s RMD, the funds must come out of your IRA by your RMD deadline, generally December 31. Better yet, plan ahead to ensure the that charity cashes the check by December 31.
Any amount donated above your RMD does not count toward satisfying a future year’s RMD.
Funds distributed directly to you or payable to you, the IRA owner, and which you then give to charity do not qualify as a QCD. The check must be made payable to a qualified charity.
What kind of charities qualify?
The charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions.
Some charities do not qualify for QCDs:
- Private foundations
- Supporting organizations: i.e., charities carrying out exempt purposes by supporting other exempt organizations, usually other public charities
- Donor-advised funds, which public charities manage on behalf of organizations, families, or individuals
A QCD is reported as a normal distribution on IRS Form 1099-R for any non-Inherited IRAs. For Inherited IRAs or Inherited Roth IRAs, the QCD will be reported as a death distribution. The gross distribution goes on line 15a of your Form 1040 and you can write $0 on line 15b for the taxable amount (if you have no other taxable distributions) and “QCD” next to it. Again, itemization is not required to make a QCD. While the QCD amount is not taxed, you may not also claim the distribution as a charitable tax deduction.
A QCD is not subject to withholding. State tax rules vary and most, but not all states, allow for charitable deductions. Depending on the state, a QCD may continue to be taxed at the state level, but in the case where you have to take your RMD anyway, then it’s still a valuable technique for federal income tax purposes. For state specific guidance, consult your tax advisor.
When making a QCD, you must receive the same type of acknowledgement of the donation that you would need to claim a deduction for a charitable contribution.
When to use a QCD
QCDs are most useful for regularly planned cash (via check) contributions to qualified charities, as there is virtually always a tax benefit for doing a QCD versus taking an RMD and separately donating cash (writing a check) to a charity. So a QCD is a tax efficient way to satisfy any RMDs you don’t need along with your regular charitable giving.
Donating long term appreciated securities, however, is typically superior than making a cash contribution to charity. In some situations, it can be even more beneficial to take an RMD and offset the income by donating appreciated securities instead (which obtains a charitable tax deduction to offset the RMD income and also permanently avoids capital gains taxes!).
If you questions, please contact your ACM Wealth Advisor.
1 Per the IRS, a SEP or SIMPLE IRA is considered active if it has been maintained under an employer arrangement under which an employer contribution is made for the plan year ending with or within the IRA owner’s taxable year in which charitable contribution would be made.
2 The applicable IRS “ordering rules” require that any QCD is deemed to come from pre-tax funds first, ensuring the most favorable tax treatment. If a QCD ends up using all of the pre-tax funds from all IRA accounts, then a QCD on any after-tax dollars from an IRA will be eligible for a charitable deduction. So for taxpayers who itemize deductions, there is no downside if your distributions include after-tax IRA funds.
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