Your Guide to Qualified Charitable Distributions
Planning your IRA withdrawal strategy can feel complicated. There are some pretty strict guidelines to follow and sometimes it can feel like it’s just too difficult to withdraw the needed amount each time. Enter Qualified Charitable Distributions or QCDs.
QCDs are direct transfers of funds from your IRA that are payable to a qualified charity. They can be counted towards fulfilling your required minimum distributions for the year as long as you meet certain rules.
When you choose to make a QCD, not only are you giving to a charity, that QCD also excludes the amount donated from your taxable income. This means you can lower your overall taxable income which could reduce the impact of select tax credits and deductions like Social Security and Medicare.
QCDs don’t require itemization so you can choose to take advantage of a higher standard deduction but still use a QCD for charitable giving.
Are You Eligible to Make a QCD?
Many IRAs – Traditional, Rollover, Inherited, SEP (inactive only), and SIMPLE (inactive only) – are eligible for QCDs, there are requirements:
– You must be 70.5 or older
– QCDs are limited to the amount that would have otherwise been taxed as ordinary income
– The maximum qualifying amount for a QCD is $100,000. This applies to the sum of QCDs made to one or more charities in a single calendar year; however, if you are filing jointly, your spouse can also make a QCD up to $100,000 from his or her own IRA as well.
– In order to qualify for that year’s RMD, the QCD must come out of the IRA by your RMD deadline – usually December 31st.
– Contributing to your IRA might cause the amount of a QCD you can deduct to go down
Any sum donated above your RMD does not count towards fulfilling the next year’s RMD and any funds distributed directly to you as the IRA owner that you then give to charity, do not qualify as a QCD.
In specific instances, a QCD might be made from a Roth IRA but since Roth IRAs are not subject to RMDs when you are alive, you will want to consult with a tax advisor before making a QCD from your Roth IRA.
Which Charities Qualify?
Any charity that is a 501(c)(3) organization that is eligible to receive tax-deductible contributions qualifies.
Private foundations, supporting organizations, and donor-advised funds do not qualify.
How are QCDs reported?
Any QCDs will be reported as a normal distribution on IRS Form 1099-R for any non-inherited IRAs. For Inherited IRAs, Roth or otherwise, the QCD will be reported as a death distribution.
QCDs are not subject to withholding but state tax rules vary so consult with a tax advisor prior to making any decisions.
When you make a QCD, make sure that you get an acknowledgement of the donation, so you have the proper documentation for the claim for tax purposes.
Still have questions about QCDs? The experts at MCK can help! Contact us to schedule a consult.