Qualified Charitable Distributions: The Tax-Savvy Way to Give Back
As you plan your year end charitable giving, you might evaluate using a qualified charitable distribution (QCD) in place of your required minimum distribution (RMD) from your IRA.
As the year-end holiday season approaches, you can be sure of several things. First, you will be bombarded with advertisements to buy more items than you could possibly imagine. Second, you will receive numerous solicitations to contribute to various worthwhile charities. Third, you will be subject to reminders—including from STRATA Trust Company—to take your required minimum distribution (RMD) from your IRA if you are at least age 73. Although we cannot help you avoid holiday advertising, you can combine charitable giving with satisfying your annual RMD. The IRS permits taxpayers who have reached age 70½ to contribute to eligible charitable organizations and to exclude such donations from income. So, as we approach this holiday season, consider helping worthy charities—while giving yourself a welcome tax break—by using a qualified charitable distribution, or QCD.
QCD BACKGROUND
QCDs were first introduced in 2006, but only as a short-term provision. Several successive legislative acts extended QCD provisions until they were made permanent starting in 2015. What made QCDs phenomenally attractive was the Tax Cuts and Jobs Act of 2017. This measure increased the standard tax deduction for most taxpayers. As a result, the number of taxpayers submitting income tax returns with itemized deductions decreased from 48.7 million in 2017 to only 20.4 million in 2018. This radical increase in taxpayers using the standard deduction also led to a sizable increase in the number of people taking advantage of QCDs.
Example:
Meredith is 75 and still working part-time. She doesn’t have enough deductions to make it worth itemizing them on her tax return, so she uses the standard deduction amount. Her RMD for the year is $10,000, and she doesn’t need the money. But she doesn’t want to pay tax on it, either. So, she makes a QCD to her favorite eligible charity and reports her IRA distribution as not includible in income on her tax return. Meredith gets the same result—no taxation on the IRA distribution—but she doesn’t have to itemize her charitable gift.
QCD FUNDAMENTALS
The basic rules for making qualified charitable distributions are simple.
You must be at least age 70½. Exactly six months after your 70th birthday, you are eligible to make a QCD. You don’t have to be the original IRA owner; you can make a QCD from your inherited or beneficiary IRA, as well.
The QCD limit for 2024 is $105,000. Most IRA owners have RMDs that are much lower than this limit. You can choose to make any portion of your RMD a QCD—or even exceed your RMD amount. (The 2025 limit increases to $108,000.)
The QCD must be paid directly to the charity. This rule is important. If a check is used for the distribution, it must be cut in the name of the charity (even if you hand deliver it). Any electronic funds transfer must also be made directly to the charity. The distributing financial organization reports the QCD like any other distribution (that is, it’s a “normal” distribution that generates a code “7” on IRS Form 1099-R for a Traditional IRA QCD).
You must keep good records. As with any other charitable contribution, you should get a receipt for the QCD and keep it with your tax records to prove that you made the charitable contribution.
The receiving organization must be eligible. Most donations to charity qualify for the QCD deduction, but there are some exceptions. For example, most private foundations are not tax deductible. Seek sound tax advice if you have questions about whether your chosen recipient qualifies.
You must report your QCD on your tax return. Although you will not have to pay income tax on a QCD you must report it to the IRS.
Example:
You file an IRA Form 1040-SR (for seniors). On line 4a, “IRA distributions,” you enter the amount of your QCD. On line 4b, “Taxable amount,” you enter “0” and enter “QCD” next to line 4b.
“Ongoing” SEP and SIMPLE IRAs are not eligible for QCDs. If you have an IRA that continues to receive SEP or SIMPLE contributions, a QCD cannot be taken from that IRA in any year for which a contribution is made.
TAKE ACTION BEFORE YEAR-END
RMDs are normally due by December 31 of each distribution year. STRATA’s IRA account holders should request their RMDs by December 1 of each year to give STRATA enough time to meet this December 31 deadline.