If you are 70 ½ or older and enjoy supporting your favorite charities, you have likely heard the phrase “Qualified Charitable Distribution,” or QCD.
This unique method of charitable giving allows some taxpayers to donate directly to certain charitable organizations from their retirement funds.
Even better: This particular means of altruism can even reduce your tax burden and count towards the required minimum distribution (RMD) amount from an IRA (Individual Retirement Arrangement).
At the same time, however, this approach has some pitfalls. Regarding QCDs, timing is everything, and with the year-end drawing closer, your opportunity to potentially take advantage of this strategy for the current tax year is almost gone. Additionally, common mistakes such as using up your RMD, allowing a QCD to pass through your bank account, or failing to document the transaction correctly can scuttle your plans.
Therefore, it’s essential to have the best possible understanding of QCDs before you pursue this method.
To learn more about the rules and benefits of making a Qualified Charitable Distribution and the considerations you’ll need to keep in mind at tax time, continue reading below.
In the simplest terms, a Qualified Charitable Distribution, or QCD, is a distribution from a retirement account that is given directly to a charity. Some conditions apply; for example, only certain charities qualify for QCDs. Additionally, QCDs are nontaxable only when all of the qualifications are met (whereas distributions from retirement accounts, such as IRAs, would generally be taxable in the year received). Finally, as a QCD is nontaxable when said qualifications are met, you cannot claim a charitable contribution deduction for the payment.
Generally, a Qualified Charitable Distribution is made by the trustee of an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual aged 70 ½ or over directly to a charitable organization eligible to receive tax-deductible contributions.
QCDs are a popular way to do some good while also reaping some benefits for your tax planning strategy.
One significant benefit of taking a QCD is that it can satisfy all or part of your required minimum distribution or the minimum amount you must withdraw from your IRA each year.
You cannot keep retirement funds in your account indefinitely, and generally, you have to start taking withdrawals when you reach age 70 ½. (However, it is worth noting that changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019 now allow those whose 70th birthday is July 1st, 2019, or later to delay taking withdrawals until age 72. Additionally, Roth IRAs do not require withdrawals until after the owner’s death.
Nevertheless, in many cases, you will have to take your RMD each year. While you can withdraw more than the minimum required amount, generally, you cannot withdraw less, and your withdrawals are included in your taxable income — unless part of your RMD is tax-free, such as in the case of QCDs.
For example, if your 2021 RMD was $10,000, and you made a $5,000 Qualified Charitable Distribution for 2021, you only have to withdraw another $5,000 to satisfy your minimum for the year. Doing this will lower your taxable income versus if you had taken the fully taxable $10,000 distribution without using a QCD.
As mentioned before, QCDs can only be used for organizations eligible to receive tax-deductible contributions. Additionally, you must be at least age 70 ½ when you make the distribution.
Some other rules governing Qualified Charitable Distributions include:
There are also specific qualifications that you must meet to take a QCD. For example:
Lastly, it is also worth noting that you are permitted to spread your QCD across multiple operating charitable organizations, provided they qualify (donor-advised funds, for example, do not qualify).
In short, no — the QCD is only available as a tax-free transfer from an IRA. However, workarounds can still allow you to make tax-free donations from a 401(k). For example, you can roll your 401(k) funds into a traditional IRA and then take QCD from there. Alternately, as part of your estate planning, you can name a public charitable organization, like a donor-advised fund, as a beneficiary to be paid upon your death (although that’s a bit too late for you to enjoy the tax benefits personally!).
To report a qualified charitable distribution on your tax returns, you generally must report the total amount of the charitable distribution using Form 1040 on the line for IRA distributions.
On the line for the taxable amount, enter zero if the full amount was a qualified charitable distribution — however, to avoid making an error, ensure that the total amount of your contribution was actually nontaxable as a QCD! Then, enter “QCD” next to this line.
For additional information, see the Form 1040 instructions.
You must also file Form 8066, Nondeductible IRAs, if either of the following applies:
Charitable distributions are reported on Form 1099-R for the calendar year the distribution is made.
As a way to do some good through charitable donations while also reducing your required minimum distribution and tax burden, Qualified Charitable Distributions are an attractive option — as long as you understand and take care in executing the process.
Additionally, as in any tax strategy, looking ahead is vital. Planning your QCD at the beginning, not the end, of the year is one of the best ways to maximize your benefit.
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
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