A Qualified Charitable Distribution (QCD) is a direct transfer of funds and/or assets from your IRA custodian directly to a qualified charity. QCDs count toward your annual required minimum distribution (RMD) as long as certain rules are met. More importantly, any QCDs exclude the amount donated from taxable income. While this is a benefit to your tax bill, by reducing income you can also reduce tax that may be payable for things like Social Security and could reduce Medicare premiums.

As Washington is known to do, the rules surrounding tax-free Qualified Charitable Distributions (QCDs) from an IRA to a charity have changed many times over the years. The constant changing between QCDs being allowed and forbidden made it impossible to use as a long-term financial planning and charitable giving tool. Investors were forced to jump at the opportunity when available, but not able to count on a sustained strategy.

In 2015 Congress passed the Protecting Americans from Tax Hikes Act (PATH). The goal of PATH was to eliminate confusion around many “on again, off again” tax strategies. Important to this discussion, the PATH bill made QCD rules permanent. Investors can now comfortably plan to use QCDs as a long-term tax and financial planning tool while also benefiting the charities of their choice.

Who Can Make a QCD?

Most tax deferred IRA accounts are eligible for QCDs. This would include Traditional IRAs, Rollover IRAs, Inherited IRAs, SEP IRAs (inactive plans only ) and SIMPLE IRAs (inactive plans only). However, there are important requirements that must be met to ensure the contribution meets the definition of a QCD:

  • You must be old enough to take a Required Minimum Distribution (70 ½) to be eligible to make a QCD.
  • QCDs can only be used on amounts that would normally be taxed as ordinary income. This means non-deductible contributions like those made in non-deductible IRAs or Roth IRAs are not eligible for QCD treatment.
  • There is a maximum annual limit of $100,000 that can qualify for a QCD. This is gross sum, not an amount per charity. However, if you file jointly, both you and your spouse can make separate $100,000 contributions for a total QCD of $200,000 per tax year.
  • Funds must exit your IRA by the deadline for your RMD, which is typically December 31 of each tax year.
  • Funds must transfer directly from your custodian to the qualified charitable organization. You are not allowed to take a distribution personally and then make the charitable contribution yourself.
  • If you make a QCD in an amount greater than your RMD for the applicable tax year, it does not count toward future RMDs.

What Charities Qualify for QCDs?

  • Only 501(c)(3) organizations qualify for QCD treatment. Other types of charitable organizations, such as private foundations or donor advised funds are not eligible. It is important to verify the charity’s tax status before undertaking a QCD.

Tax reporting

  • Your custodian will report your QCD as a normal distribution on IRS Form 1099-R for any non-inherited IRAs. If the distribution is being made from an inherited IRA or Roth IRA, the custodian will report the QCD as a death distribution.

When you make a QCD, you must receive the same type of contribution acknowledgement of the donation which you would use to claim a deduction for a normal contribution. You are not required to itemize your tax return to make a QCD. Since the QCD is not taxed, you are not allowed to then claim the distribution as a separate charitable tax deduction.

A QCD is not subject to income tax withholding. However, state tax rules may vary so it is important to consult a tax advisor.

Insight Tax and Accounting Services is happy to discuss a Qualified Charitable Distribution with you to see if it is an appropriate tool in your tax planning process. If you have any questions, or would like assistance determining if your distribution is eligible for a QCD, please contact Scott Manhart at smanhart@insightwealthgroup.com or at (515) 273-1333.