Many people aren’t receiving all the benefits they could from the qualified charitable distribution (QCD), the powerful tax-saving tool for charitably inclined IRA owners older than age 70½. The QCD drifted in and out of the tax law for about a decade, but it finally was made a permanent part of the tax code a few years ago. Now, you can count on it being part of your regular tax planning. You should plan not only to use the QCD but also to maximize the benefits.
In a QCD, you make a charitable contribution by directing your IRA custodian to transfer funds to a charity or charities you designate. Or the charity can issue you a check made payable to the charity, and you deliver the check to the charity. The QCD is not included in your gross income, yet it counts toward your required minimum distribution (RMD) for the year. That’s a hard-to-beat deal. You receive credit for making the RMD but don’t include the amount in gross income. You receive no charitable contribution deduction for the QCD, even if you itemize deductions. If you use an IRA to make a charitable contribution but it doesn’t qualify as a QCD, the results are very different. You would include the distribution in gross income, and it would
count as part of your RMD. You can deduct the contribution if you itemize deductions. But you might not be able to take the deduction because the standard deduction was doubled in the 2017 tax law. You take charitable contributions as itemized expense deductions only when your total itemized expenses exceed the standard deduction, which is $24,400 in 2019 for married couples filing jointly. Far fewer people qualify to deduct itemized expenses now than before the 2017 tax law.
You’re sure to receive the maximum benefit of a QCD when you plan and take your QCDs early in the year. That’s because the QCD counts toward your RMD. Suppose you take a distribution from your traditional IRA early in the year. It will be treated as part of your RMD. Later, you decide you want to use a QCD to make a charitable contribution. That distribution you already took doesn’t qualify for the QCD. The distribution was made to you in your name, instead of the custodian making a distribution directly to a charity. There’s no way you can reverse it to make it qualify for the QCD. Even if you donate the same amount to charity, the distribution is included in your gross income. You can direct the IRA custodian to distribute other money from the IRA to the charity and have that qualify as a QCD, but it doesn’t reverse the distribution you already took.
Remember, the two major benefits of the QCD are it qualifies toward your RMD for the year, but it isn’t included in your gross income. You’re getting credit for an RMD without adding to gross income. Yet, when you take a distribution from the IRA before making your QCDs for the year, that amount is included in gross income. You pay income taxes you don’t need to. Because the QCD is not included in gross income, it also reduces adjusted gross income. Using the QCD to make charitable contributions and meet your RMD also could reduce taxes on your Social Security benefits and avoid the Medicare premium surtax as well as other Stealth Taxes that are triggered by higher adjusted gross income.
When you’re over age 70½ and charitably inclined, plan and execute your QCDs early in the year. Then, if you need to take other distributions to meet your RMD amount or to pay for expenses, you can plan those distributions. Be sure you know all the rules about QCDs so you don’t miss any benefits.
You must be at least age 70½ at the time of the QCD. This is a tricky rule. An RMD may be taken any time during the year you turn age 70½. Distributions taken that calendar year but before you turned age 70½ count toward the RMD. But a transfer or distribution to a charity doesn’t count as a QCD unless you were age 70½ or older at the time of the transaction.
You can make up to $100,000 in QCDs each year. The limit is per taxpayer, not per IRA. In married couples, each spouse has a separate $100,000 limit, but they can’t share the limits. A spouse’s limit counts only toward distributions made from that spouse’s IRAs.
The annual limit is use-it-or-lose-it. Any unused part of the limit from one year can’t be carried forward to future years.
Only transfers to public charities, known as 501 (c)(3) charities, qualify for the QCD. Distributions to private foundations, donor-advised trusts and other non-public charities don’t qualify.
QCDs can be made only from IRAs. Transfers from 401(k) plans and other types of employer retirement plans don’t qualify.
You also need to know how to report a QCD on your income tax return.
The 1099-R received from your IRA sponsor won’t indicate any amount was distributed to a charity or was eligible for a QCD. It will include the QCD in your total distributions with no special designation. You include that amount on line 4a of your Form 1040. For line 4b, you subtract the QCD and report as gross income only the distributions that doesn’t qualify as QCDs. If the entire distribution was a QCD, put $0 on line 4b. If possible, write “QCD” next to line 4b. This will explain to the IRS why the distributions you report as gross income are less than your gross distributions.
I’m a big believer in planning and taking your RMDs early in the year. But the QCD is the best way for most people age 70½ and older to make charitable gifts. So, if you’re charitably inclined, plan and execute your QCDs first. Then, plan and take any additional distributions.