Qualified Charitable Distributions from IRAs
With another year coming to an end, year-end planning decisions are on the minds of many of our clients. During these planning discussions, I am surprised about how many people are unaware of what a qualified charitable distribution (QCD) is. Whether used to satisfy charitable goals or reduce taxes, it is a beneficial strategy to discuss and consider building into your financial plan.
What is a QCD?
A QCD is a direct transfer of funds from an IRA, payable to a qualified charity. These distributions can be counted toward the satisfaction of a required minimum distribution (RMD) if certain rules are followed.
What are the rules?
- The IRA owner must be age 70 ½ or older to be eligible for a QCD. While the RMD rules begin in the year the account holder reaches age 70 ½, the IRA owner cannot take advantage of the QCD until the date they reach age 70 ½. For example, a taxpayer with a birthday on February 1st will reach age 70 ½ on August 1st and can only make a QCD after August 1st.
- While a QCD can count toward the required minimum distribution (RMD), the funds must come out of the account before December 31st. It is important that the charity deposit the check before December 31st, otherwise the distribution may not count toward the current year’s RMD.
- The maximum annual amount for a QCD is $100,000. This limitation applies to the sum of QCDs made to one or more charities by each taxpayer. A married couple can distribute $200,000 in total, if the $100,000 limit is not exceeded by each spouse.
- Any amount donated above the RMD cannot be counted towards satisfying a future year’s RMD.
- Only IRAs are eligible for the QCD. Employer sponsored plans such as 401(k)s and 403(b)s are not eligible. If an individual with one of these plans wishes to take advantage of the QCD, they will need to rollover the funds to an IRA before they will be eligible. Note that if they wish to take advantage of the QCD in 2020, the rollover will need to occur before the end of 2019.
- A qualified charity is defined as a 501(c)(3) organization. Charities that do not qualify for a QCD include donor-advised funds, private foundations, and supporting organizations (charities carrying out exempt purposes by supporting other tax-exempt organizations).
- A QCD is reported as a normal distribution on IRS Form 1099-R for an IRA. The custodians issuing these tax forms will not distinguish between normal distributions and distributions to charity. In other words, the 1099-R will NOT reference your QCDs. It is your responsibility to tell your tax preparer the amount of IRA distributions that were QCDs. A QCD must meet the same substantiation requirements as other charitable gifts, such as written acknowledgment from the charity for gifts valued over $250.
- A QCD is tax-free only if the entire amount transferred to the charity would otherwise be deductible as a charitable contribution, ignoring the percentage-of-AGI limits. So, if the amount contributed would be reduced because a benefit is received in exchange, the exclusion is not available for any part of the amount transferred to charity.
What are the benefits?
Distributing the funds directly from the IRA to charity reduces the amount of taxable income reported on the IRA owner’s tax return. The distribution does not also qualify as an itemized deduction, however given the increase in the standard deduction, many of our clients have found that a QCD is more beneficial than an itemized deduction (see example below). In addition, reducing adjusted gross income may help to keep you below certain thresholds including the threshold for Medicare Surtax and modified adjusted gross income (MAGI) for the calculation of Medicare premiums.
| Qualified Charitable Deduction Example MFJ Couple, Age 70+ | |||
| Income | 2019 | 2019 (w/ $15K QCD) | Difference |
| Wages & Social Security | 50,000 | 50,000 | 0 |
| Pension & IRA Distributions | 200,000 | 185,000 | 15,000 |
| Total Income | 250,000 | 235,000 | 15,000 |
| Itemized Deductions | |||
| Charitable Contributions | 15,000 | 0 | 15,000 |
| State and Local Taxes | 10,000 | 10,000 | 0 |
| Total Itemized | 25,000 | 10,000 | 15,000 |
| vs. Standard Deduction * | 27,000 | 27,000 | 0 |
| Taxable Income | 223,000 | 208,000 | 15,000 |
| Federal Tax | 40,069 | 36,469 | 3,600 |
So, if you have not taken your full RMD for 2019, and plan to make charitable contributions between now and the end of the year, you may want to consider a QCD. If you have already taken your RMD for 2019, then now is your chance to be proactive and consider one for 2020.
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