With the end of the year approaching, tax planning and charitable giving are probably top of mind for many of your clients. For individuals who are age 70½ and older, a qualified charitable distribution (QCD) could provide a unique opportunity to support the causes they love while possibly minimizing taxes in retirement.
Download our free “Quick Guide to Charitable Giving Options” to identify the most appropriate method to meet clients’ philanthropic goals.
As you may know, a QCD is a payment made directly from an IRA to an eligible charitable organization. Specific requirements and circumstances must be met before an IRA owner can make a QCD. To help you understand the ins and outs of this charitable distribution—and be a go-to resource for your clients—I’ve compiled the following common questions and answers about QCDs.
Q: What Are the Tax Advantages of a QCD?
A: Generally, regular IRA distributions are considered taxable income for the IRA owner. Qualifying amounts that clients donate as a QCD, on the other hand, are excluded from their taxable income. As such, they can use QCDs for lowering their taxable income and, perhaps, minimizing taxes in retirement.
Q: Who Is Eligible to Make a QCD?
A: To make a QCD, the IRA owner must be age 70½. Further, the distribution must be made on or after the date he or she reaches 70½.
Q: Can an Individual Take a Charitable Deduction for a QCD?
A: Although a QCD is not taxed, it cannot be claimed as a charitable deduction. A tax advisor can help clients determine whether a QCD or a charitable deduction provides the most benefit based on their situation.
Q: What Is the Maximum Distribution Amount?
A: The maximum allowable amount per year that can be distributed as a QCD is $100,000. Any donation amount above $100,000 will not be considered a QCD and will not qualify for the QCD tax benefit. For married taxpayers filing a joint tax return, $100,000 can be donated from each spouse’s IRA.
Q: Can More Than One QCD Be Made per Year?
A: Yes. As long as your client is eligible, there’s no limit on how many QCDs can be made. Just be sure that the total amount of distributions does not exceed the $100,000 annual limit and that the distributions are made by December 31.
Q: Can QCDs Satisfy Required Minimum Distributions (RMDs)?
A: Yes. QCDs can be used to satisfy RMDs.
Q: Can a QCD Be Made from Any Type of IRA and Retirement Account?
A: No. QCDs can be made only from traditional IRAs and traditional inherited IRAs. If making a QCD from an inherited IRA, the client would still need to be age 70½ to qualify.
QCDs cannot be made from active retirement accounts that the client may have with his or her employer (e.g., SEP IRAs, SIMPLE IRAs, or qualified retirement plans, such as 401(k)s and 403(b)s). One exception to this rule is for nonactive SEP and SIMPLE IRAs. QCDs are available from a SEP or SIMPLE IRA plan if the plan has been terminated with the employer or the client is no longer employed with the company sponsoring the plan.
Under certain circumstances, a QCD may be made from a Roth IRA. Roth IRAs, however, are not subject to RMDs and distributions are generally tax free. So, your clients should consult with a tax advisor to determine if making a QCD from a Roth is appropriate for their circumstances.
Q: Are Special Processing Requirements Involved?
A: Yes. To qualify as a QCD, the payment must be made directly from the IRA to the charity. So, when issuing a check from the IRA, the check must be made payable to the charity. The funds cannot be distributed to the IRA owner and then later donated as a personal check. Typically, the check is mailed directly to the charity. In some situations, it can be mailed to the IRA owner, who can then send it to the charity (again, the check must be payable to the charity).
In addition, QCDs are calendar-year transactions. In order to receive a benefit, the distribution must be processed by the end of the calendar year that applies to that particular tax year. There is no option for a QCD to be distributed and applied to a prior tax year.
Q: Can a QCD Be Processed Via a Client’s Check Written Directly Against the IRA?
A: While this will satisfy the QCD requirements, it is not recommended. First, sometimes taxes are withheld automatically on checks written against IRAs, and withholding taxes from QCDs is not advisable. Second, IRA custodians report the distribution only after the receiving charity cashes the check. If the charity fails to cash the check in a timely manner, the distribution may not be reported as the client intended.
Q: Are All Organizations Eligible to Receive IRA Payments Made as QCDs?
A: No. The receiving charity must be an organization eligible to receive tax-deductible contributions. Charities that do not qualify include private foundations and donor-advised funds. The best practice is for your client to check with his or her tax preparer or with the organization to confirm eligibility before making the distribution.
Q: How Are QCDs Reported on Tax Documents and Tax Returns?
A: All distributions taken from the IRA will be reported on the Form 1099-R issued to the client and to the IRS. Here, be sure your client is aware that there is no special coding on this form that designates a distribution as a QCD.
It is recommended that clients notify their tax preparer of their intent to make a QCD. That way, the tax preparer can report the distributions and income recognition accordingly. In general, however, a QCD is reported on Form 1040 as follows:
- Enter the full amount as a charitable distribution on the line for IRA distributions.
- On the line for the taxable amount, enter zero if the full amount was a QCD. Then, enter “QCD” next to this line.
The charitable organization may provide the client with a receipt for the payment, which can be included with the client’s tax filing as proof of the donation.
Q: What If the QCD Is Made from an IRA Consisting of Both Deductible and Nondeductible Contributions?
A: Distributions made under the QCD provisions will be made from the deductible (pretax) portion of the IRA before the nondeductible (after-tax) portion.
Discussing the Tax Advantages of a QCD
Of course, these are just some of the questions your clients may have about QCDs. But by educating yourself on this and other charitable giving strategies, you will be well positioned to help your clients both reach their charitable goals and reduce their taxable income.
What other questions have your clients asked about QCDs? Are there other charitable giving strategies you recommend to reduce taxable income? Please share your thoughts with us below!
Commonwealth Financial Network does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Editor’s Note: This post was originally published in July 2017, but we’ve updated it to bring you more relevant and timely information.