QCDs: Tax-Free Gifts to Charity
If you have an IRA, you are required to take out a certain amount of money each year once you reach age 73, even if you don’t need the funds. This is known as a required minimum distribution and it can increase your taxable income, potentially pushing you into a higher tax bracket.
How QCDs work
However, IRA owners who are aged 70-1/2 and older can transfer up to $100,000 tax-free to one or more charities each year through QCDs. This provides a way for eligible older Americans to donate to charity before the end of the year and can be counted toward their RMD for the year if they are at least 72.
The best part is that QCDs reduce the balance of your IRA and lower your RMDs in the future. If you itemize the giving on your taxes, the QCD can also be above the limits of what you can claim as a tax deduction. This means that QCDs can potentially enable you to make a larger charitable gift to your favorite charity.
You can exclude up to $100,000 of QCDs from your gross income. If you’re married, both of you have IRAs and you’re each over age 70-1/2, then you can exclude up to $200,000 per year. You can make one large contribution or several smaller ones throughout the year, and you can use any type of IRA to make a QCD.
Distributions from a traditional IRA are usually taxable, but they become tax-free if paid directly to an eligible charity. You can make QCDs electronically or by check, and they must be made by the same deadline as a normal distribution to count toward your minimum annual IRA distribution, typically by Dec. 31 of the tax year in question.
When you make a charitable donation, you must obtain a written acknowledgment from the charity that includes the date and amount of your contribution, as well as any value you received in return. Publication 526, available on the IRS website, provides detailed instructions on what should be included in this acknowledgment.
Know about the paperwork
Your IRA custodian will provide you with a Form 1099-R, which shows all IRA distributions made throughout the year, including regular distributions and QCDs. There is no special code for a QCD, and the total distribution will be shown in Box 1 of the form.
QCDs are reported on Line 4 of Form 1040 or 1040-SR, just like other IRA distributions. If your distribution includes a QCD, enter the total amount on Line 4a, which should match the amount in Box 1 of Form 1099-R. If the entire distribution is a QCD, enter 0 on Line 4b, and if only a portion of the distribution is a QCD, the remaining taxable portion should be entered on Line 4b. In either case, make sure to label the entry on Line 4b as a QCD.
To ensure that the transaction is completed before the end of the year, contact your IRA custodian. For more information on IRA distributions and QCDs, consult Publication 590-B on the IRS website.