Qualified Charitable Donations
Qualified Charitable Distributions (“QCD”) allow eligible IRA owners aged 70.5 or older to make up to $100,000 in tax-free gifts to charity each year, offering retirees a great way to fulfill their requirement minimum distributions, avoid taxation on a portion of the IRA, and give to charity. Here are the basics on the QCD.
What is the benefit of a QCD?
Normally, distributions from a traditional IRA are taxable, but with a QCD, these distributions become tax-free as long as they’re paid directly from the IRA to an eligible charitable organization. In order for the distribution to qualify for the tax-free treatment, the distribution must be made directly from the trustee (e.g., Schwab) to the charity. Distributing the funds to the IRA owner invalidates the QCD and results in a different, less favorable tax treatment.
Each year, an IRA owner age 70½ or over when the distribution is made can exclude from gross income up to $100,000 of these QCDs. For a married couple, if both spouses are age 70½ or over when the distributions are made and both have IRAs, each spouse can exclude up to $100,000 for a total of up to $200,000 per year.
What if I don’t itemize my deductions?
The QCD option is available regardless of whether the IRA owner itemizes deductions. In fact, one benefit of QCD is that they allow IRA owners to exclude their charitable giving from income and still receive a standard deduction, allowing IRA owners to receive the benefit of the giving even if they do not itemize.
Do I still need a receipt?
QCDs are not deductible as charitable contributions on Schedule A. But, as with deductible contributions, the donor must get a written acknowledgement of their contribution from the charitable organization before filing their return.
In general, the acknowledgement must state the date and amount of the contribution and indicate whether the donor received anything of value in return. For details, see the Acknowledgement section in Publication 526, Charitable Contributions.
How do I report the QCD on my tax return?
Even though the QCD is non-taxable it must be reported on the income tax return. After the end of the year, typically in January of the following year, the IRA owner will receive a 1099-R detailing any IRA distributions made during calendar year 2023, including both regular distributions and QCDs. The total distribution is shown in Box 1 on that form. There is no special code for a QCD.
Like other IRA distributions, QCDs are reported on Line 4 of Form 1040 or Form 1040-SR. If part or all an IRA distribution is a QCD, enter the total amount of the IRA distributions on Line 4a. This is the amount shown in Box 1 on Form 1099-R. However, only the taxable amount of the IRA distribution is entered on line 4b. Note that the 1099-R will not specify the amount that may be excluded, the preparer must calculate that amount. For example, if $40,000 in total distributions were made during the year, then the 1099-R will show $40,000. However, if only $30,000 went to the IRA owner and $10,000 was a QCD, then only $30,000 will be entered on Line 4b. If you are using a tax preparer, be sure to provide him with the QCD information since the 1099-R is not enough.
If you have questions about QCD’s, simply give us a call, we would be happy to help.