A client recently told me that they strongly dislike having to take their Required Minimum Distribution (RMD) from their IRA each year, first because they don’t need the income, and second because they must pay income taxes on the amount withdrawn. Unfortunately, there’s no way to completely avoid taking an RMD each year, but there is a way to avoid having to pay federal income taxes on the RMD.
Qualified Charitable Distributions, or QCDs, are a direct gift to a qualified charity from an individual’s IRA. When you make a QCD, the amount gifted to charity can be excluded from your federal taxable income in the year of the withdrawal. This means that you would not owe any federal income taxes on the QCD up to a certain amount. Sounds great, right? There are some important details to keep in mind:
- The gift must be sent directly to the charity from the IRA custodian and can’t be done from an employer plan account such as a 401(k), 403(b) or 457. This can typically be done in one of two methods:
- A Third-Party check written by the IRA custodian made out to the charity.
- A check written by the IRA account holder payable to the charity, using their IRA check writing capabilities. Check writing privileges are an additional feature and can be added to most IRA accounts. Most IRA custodians do not withhold any income taxes on checks written using the check writing feature.
- The responsibilities of keeping track of QCDs, reporting them to the IRS, and having the necessary documentation in the event of an IRA audit, are solely borne by the taxpayer.
- It is up to the taxpayer to keep track of the QCDs they have made in a given year and report the total amount of QCDs their tax return, or to their tax preparer.
- When an individual receives their Form 1099-R for the year for their IRA distributions, there is no separate reporting of QCDs. For example, if a taxpayer made QCDs totaling $20,000 and took an IRA distribution of $10,000 in a tax year, the Form 1099-R will show an IRA distribution of $30,000.
- You cannot deduct the QCD as a charitable deduction on Schedule A.
- The total of QCDs are deducted on the line of the 1040 that reports the total IRA distribution for the year. In the above example of the $30,000 distribution, the IRA line on the 1040 would note that there was a “QCD” for the year and only the $10,000 taxable portion of the distribution would be included in Adjusted Gross Income (AGI).
- Always request a receipt or letter from the charity acknowledging the donation.
- An individual cannot make QCDs more than the lesser of 1) their RMD amount or 2) $100,000 in a calendar year.
- If your RMD is $10,000, QCDs can only be made up to $10,000, any amount over the $10,000 given to charity from the IRA would be considered a normal taxable distribution.
- If your RMD is $120,000, you would only be able to make QCDs up to $100,000.
- Again, keep in mind all distributions from your IRA will always be reported as a normal distribution on your Form 1099-R.
- The charity needs to be a public charity, for example your church or the American Red Cross.
- QCDs cannot be made to a donor advised fund or private foundations.
- If you are wondering if an organization is considered a public charity, you can check to make sure it is listed on this IRS website.
Who are QCDs for:
- You must be over 70½ and required to take and RMD in the tax year, to take advantage of making a QCD.
- Anyone who does not itemize deductions on their tax return. For individuals who don’t itemize their deductions, because their standard deduction exceeds their itemized deductions, QCDs can be especially beneficial. A taxpayer can take the standard deduction and still take advantage of QCDs.
- People that want to reduce their Adjusted Gross Income to keep it below an amount that will result in an increase of their Medicare premium in the future.
Have questions about Qualified Charitable Distributions or would like to see if they make sense for you? Please call IIS Financial Services and ask for your advisor or schedule a 30 minute call. You can also contact us by email and we will be happy to help. As always, be sure to also consult your tax preparer or accountant.
If you would like to learn more, click here to be directed to our page with topics dedicated to the needs of Retirees.
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WSJ – The Secret Way Seniors Can Keep Deducting Gifts to Charities
IRS – Retirement Plans FAQ’s regarding IRA Distribution Withdrawals