If you are 70½ years old or older, the best way to make charitable contributions is usually through Qualified Charitable Distributions (QCD) from a traditional IRA. A QCD can meet your Required Minimum Distribution (RMD) for the year and lower your income taxes.
The QCD was a temporary change in 2006, but was regularly incorporated into tax law in 2015. You should include the QCD in your tax planning if you are over 70½ years old and are non-profit at all.
If a charitable contribution is made by a traditional IRA and does not qualify as a QCD, the contribution will be treated as a distribution and included in the gross income of the owner. The result is the same whether the contribution is made through a direct transfer from the IRA custodian to the charity or through a distribution to the IRA owner, who then makes a charitable contribution.
The owner can make a charitable contribution deduction, but only as part of the expenses listed in Appendix A. Most people stop reporting because the standard deduction is so high.
In 2020, up to $ 300 in charitable donations could be withdrawn without listing the cost. There is also an exception in 2021. A married couple can deduct up to $ 600 in charitable donations without making a listing, and an individual up to $ 300.
However, the results are very different if the post qualifies as a QCD.
When a QCD is created, the contribution made by the IRA is not included in the gross income of the IRA owner. The owner also does not deduct the contribution. The QCD will count towards each RMD for the year. (The starting age for RMDs is now 72, but QCDs can still start at 70½.)
For example, let’s say your RMD for the year is $ 17,000. Earn at least $ 17,000 in QCDs and you’ll have satisfied both your RMD and $ 17,000 in your donations for the year. The money comes from your traditional IRA, but there is no gross income on your tax return.
A QCD can be a good strategy in a year that turns a traditional IRA, in whole or in part, into a Roth IRA. In the year of conversion, you still need to take your RMD for the year regardless of when during the year the conversion occurs. You cannot convert the RMD amount. Without the QCD, you would have to include the RMD along with the converted amount in your gross income. The alternative is to create a QCD with the RMD amount. This will keep the RMD amount off your gross income.
For a charitable distribution from an IRA to qualify as a QCD, the charitable contribution must be made directly to the charity by the IRA custodian or trustee. If you receive a distribution from the IRA and you later make a contribution to charity, it is not considered a QCD. This distribution will be included in gross income.
Alternatively, the IRA custodian can give you a check to be paid to the charity, and you can deliver that check to the charity. Your IRA custodian may also provide you with a check book. You can write a check against the IRA directly to a charity. Each of these actions counts as a QCD.
You must be at least 70½ years old when you donate. If you turn 70½ in the calendar year, transfers from the IRA to a charity prior to your 70½ do not count as QCDs.
QCDs are capped at a maximum of $ 100,000 per taxpayer per year. Regardless of the amount of your RMD for the year, you can give up to $ 100,000 to charities as QCDs to your IRA.
If your IRA charity donations exceed US $ 100,000 for the year, contributions over US $ 100,000 will be treated as non-QCDs and will be taxed as described earlier in this article. If your QCDs are less than $ 100,000, do not carry over the unused amount to increase the limit in future years. The $ 100,000 annual limit is a use-it-or-lose-it amount.
The annual limit of $ 100,000 applies per taxpayer. There is no dividing line between married taxpayers.
A QCD can only be created by an IRA. Employer retirement plans are not suitable for QCDs. QCDs can also only be created from simplified employee pensions (SEPs) and simple IRAs if the plan for the plan year ending on or during the calendar year in which the IRA owner wishes to make the charitable contribution has not received an employer contribution from the IRA.
After-tax money cannot be used to make a QCD. Unlike in other situations, the pre-tax money in a traditional IRA can be segregated and designated for a QCD. In other situations, taking money out of the traditional IRA would automatically be prorated between pre-tax and post-tax money.
If your IRA has a mix of pre-tax and after-tax money and you are using the pre-tax money to create a QCD, it will reduce the pre-tax money in the IRA. This will reduce income taxes in future years if the IRA money is distributed or converted into a Roth IRA.
The IRA owner cannot benefit from the donation. Any small gift or reward from the charity could result in the entire contribution being ineligible for QCD treatment. However, a QCD can be used to fulfill a pledge made by the IRA owner to the charity.
All regular rules for proving charitable donations must be followed. This means that the IRA owner must have written documentation from the charity indicating the amount and date of the contribution.
QCDs can only be awarded to nonprofit organizations that are eligible for deductions for charitable contributions under regular IRS rules. Gifts to private foundations and donor-advised funds or to fund donation pensions for charitable purposes are not suitable for QCDs.
The SECURE Act allows contributions to traditional IRAs after the age of 70. It also prohibits a person from combining a QCD and deductible IRA contributions made after age 70.
Make sure you are properly reporting the QCD on your income tax return. The IRA custodian issues a Form 1099-R that shows the total amount of IRA distributions during the year. No distinction is made between QCDs and other distributions. You indicate the full amount of gross distributions on line 4a of your Form 1040. Subtract the QCDs and enter the amount of taxable distributions in line 4b.
Next to line 4b you should type “QCD” to let the IRS know that you have excluded some of the distributions as QCDs.