Did you know that there are exceptions to distributions from traditional IRAs being taxable in the year you receive them? There are several, including the Qualified Charitable Distribution (“QCD”).
A QCD is a reportable distribution of funds from your IRA that is made payable directly to a qualified charity, which is reported as a normal distribution on IRS Form 1099-R for non-inherited IRAs or as a death distribution for inherited IRAs or inherited Roth IRAs. QCDs may be used to satisfy your required minimum distributions (RMDs) for the year, as long as certain rules are met. As is the case when contemplating a taxable event, you should consult with your tax professional before initiating a QCD to ensure that your IRA and the charity you choose are both eligible.
A QCD is generally a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions. You must be at least age 73 when the distribution was made, based on the stepped up age for 2023. Also, you must have the same type of acknowledgment of your contribution that you would need to claim a deduction for a charitable contribution. See Substantiation Requirements in IRS Pub. 526.
The maximum annual exclusion for QCDs is $100,000. Any QCD in excess of the $100,000 exclusion limit is included in income as any other distribution. If you file a joint return, your spouse can also have a QCD and exclude up to $100,000, bringing to total QCD for your household to $200,000. The amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.
The following account types are eligible for QCDs:
Traditional IRA
Inherited IRA
Roth IRA
SEP IRA (inactive plans only)
SIMPLE IRA (inactive plans only)
What types of charities qualify for a QCD? The charity must be a 501(c)(3) organization in order to qualify to receive tax-deductible contributions. Some charities that do not qualify for QCDs are:
Private foundations.
Supporting organizations (i.e. charities carrying out exempt purposes by supporting other exempt organizations, usually other public charities).
Donor-advised funds, which public charities manage on behalf of organizations, families, or individuals.
You can’t claim a charitable contribution deduction for any QCD not included in your income.
A QCD will count towards your required minimum distribution, discussed earlier.
If you would like to discuss how a QCD could benefit you or be utilized by you, contact our office to discuss.
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See below for examples and illustrations put together by the IRS.
Example.
On December 23, 2021, Jeff, age 75, directed the trustee of his IRA to make a distribution of $25,000 directly to a qualified 501(c)(3) organization (a charitable organization eligible to receive tax-deductible contributions). The total value of Jeff’s IRA is $30,000 and consists of $20,000 of deductible contributions and earnings and $10,000 of nondeductible contributions (basis). Because Jeff is at least age 70½ and the distribution is made directly by the trustee to a qualified organization, the part of the distribution that would otherwise be includible in Jeff’s income ($20,000) is a QCD.
In this case, Jeff has made a QCD of $20,000 (his deductible contributions and earnings). Because Jeff made a distribution of nondeductible contributions from his IRA, he must file Form 8606 with his return. Jeff includes the total distribution ($25,000) on line 4a of Form 1040-SR. He completes Form 8606 to determine the amount to enter on line 4b of Form 1040-SR and the remaining basis in his IRA. Jeff enters -0- on line 4b. This is Jeff’s only IRA and he took no other distributions in 2021. He also enters “QCD” next to line 4b to indicate a qualified charitable distribution.
After the distribution, his basis in his IRA is $5,000. If Jeff itemizes deductions and files Schedule A (Form 1040) with Form 1040-SR, the $5,000 portion of the distribution attributable to the nondeductible contributions can be deducted as a charitable contribution, subject to adjusted gross income (AGI) limits. He can’t take the charitable contribution deduction for the $20,000 portion of the distribution that wasn’t included in his income.
Offset of QCDs by amounts contributed after age 70½.
Beginning in tax years after December 31, 2019, the amount of QCDs that you can exclude from income is reduced by the excess of the aggregate amount of IRA contributions you deducted for the taxable year and any prior year that you were age 70½ or older over the amount of such IRA contributions that were used to reduce the excludable amount of QCDs in all earlier years. See the Qualified Charitable Deduction Adjustment Worksheet in Appendix D.
Example.
Jim became age 70½ in 2019 and deducted $5,000 for contributions he made in 2020 and 2021 but makes no contribution for 2022. Jim makes no qualified charitable distributions for 2020 and makes qualified charitable distributions of $6,000 for 2021 and $6,500 for 2022.
He determines he has no excludable qualified charitable distribution for 2021 as figured on his 2021 QCD Worksheet. His 2021 qualified charitable distribution is reduced by the aggregate amount of $10,000 of the contributions he deducted in 2020 and 2021, which reduces his excludable qualified charitable distribution to a negative amount of $4,000.
Jim decides to make a qualified charitable distribution of $6,500 for 2022. Jim completes his 2022 QCD worksheet by entering the amount of the remainder of the aggregate amount of the contributions he deducted in 2020 and 2021 ($4,000) on line 1. This amount is figured on his 2021 QCD worksheet and is entered on line 1 of his 2022 QCD worksheet. Jim figures his excludable qualified charitable distribution of $2,500 on his 2022 QCD worksheet ($6,500 – $4,000 = $2,500).
Jim’s Illustrated 2021 QCD Adjustment Worksheet
| 1. | Enter the total amounts of contributions deducted in prior years that you were age 70½ or older that did not reduce the excludable amount of qualified charitable contributions in prior years. | 1. | -0- |
| 2. | Enter the total amounts contributed and deducted during the current year if you were age 70½ (or older) at the end of the year. If this is your first QCD worksheet also include contributions you deducted in prior years during which you were age 70½ (or older) at the end of the year. | 2. | 10,000 |
| 3. | Add the amounts on lines 1 and 2. | 3. | 10,000 |
| 4. | Enter the total amounts of qualified charitable distributions made during the current year, not to exceed $100,000. | 4. | 6,000 |
| 5. | Subtract line 3 from line 4. This is the amount of your excludable qualified charitable distribution for the current year.* | 5. | ($4,000) |
| *If zero or less you have no excludable qualified charitable distribution. If zero or greater enter -0- on line 1 of your subsequent QCD worksheet. If less than zero enter the amount as a positive amount on line 1 of your subsequent QCD worksheet. | |||
Jim’s Illustrated 2022 QCD Adjustment Worksheet
| 1. | Enter the total amounts of contributions deducted in prior years that you were age 70½ or older that did not reduce the excludable amount of qualified charitable contributions in prior years. | 1. | 4,000 |
| 2. | Enter the total amounts contributed and deducted during the current year if you were age 70½ (or older) at the end of the year. If this is your first QCD worksheet also include contributions you deducted in prior years during which you were age 70½ (or older) at the end of the year. | 2. | -0- |
| 3. | Add the amounts on lines 1 and 2. | 3. | 4,000 |
| 4. | Enter the total amounts of qualified charitable distributions made during the current year, not to exceed $100,000. | 4. | 6,500 |
| 5. | Subtract line 3 from line 4. This is the amount of your excludable qualified charitable distribution for the current year.* | 5. | $2,500 |
| *If zero or less you have no excludable qualified charitable distribution. If zero or greater enter -0- on line 1 of your subsequent QCD worksheet. If less than zero enter the amount as a positive amount on line 1 of your subsequent QCD worksheet. | |||
**NOTE: information and illustrations directly taken from IRS Publication 590-B (2021), Distributions from Individual Retirement Arrangements (IRAs) (https://www.irs.gov/publications/p590b#en_US_2021_publink100090626).
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
