This is the fifth article in the charitable giving options series. The first two articles (part 1 and part 2) described how charitable giving can reduce your tax liability and illustrated strategies and vehicles such as the Donor Advised Fund (DAF) that when used properly can maximize the tax benefit of charitable giving. The third and fourth articles explored Donor Advised Funds in depth. This article will describe another charitable giving strategy known as Qualified Charitable Distributions (QCDs).
What are Qualified Charitable Distributions (QCDs)?
A QCD is a charitable giving strategy where the donor writes a check directly to a charity from their IRA (individual retirement account). Normally, distributions from pre-tax IRAs are taxed as ordinary income. With a QCD, the distribution is excluded from income.
There are a few general rules around QCDs:
- You can only make a QCD if you are 70 ½ or older.
- The check must be payable to the (qualifying) charity.
- Total QCDs cannot exceed $100k/year per person.
- The donations must come out of the IRA by 12/31 to count toward that year’s RMD (Required Minimum Distributions).
- To count toward your RMD, you must make QCDs before you satisfy your RMD.
How do I make a QCD?
You can make a QCD in several ways.
- Most custodians can send you a checkbook for your IRA. You can then write checks to the charity from that checkbook.
- You can also fill out a form to request that the custodian issue a check made payable to the charity. The custodian can either:
- Send the check directly to the charity, or
- Send the check to your address and then you can send the check to the charity.
The custodian will then report the QCD as a normal distribution on form 1099-R. Because the 1099-R does not separate normal distributions from QCDs, if you have an accountant, it is important to let them know that you made the charitable donation in the form of a QCD. If you do not tell your accountant that the charitable donation was a QCD and just mention that you made a charitable donation, they may include the QCD in income and take a deduction on Schedule A (which would result in a different tax amount).
Finally, it is important to keep records for tax reporting purposes. In the case of an audit, you will want proof of the money leaving the IRA and going directly to the charity. Therefore, keeping a copy of the check can be helpful. In addition, as with other charitable donations, you need to retain the acknowledgement from the charity stating the amount of the contribution and that no goods or services were exchanged for said contribution. To issue an acknowledgement, the charity will need your name and address. Generally, the custodian will list your name on the check so the charity can identify you as the donor, but in general, it is wise to request that the custodian add your name to the memo line (if permitted). You might also enclose a cover letter with each check that includes your name and address.
When Sensible clients are interested in QCDs, we work with clients to determine the optimal QCD method (client checkbook or custodian-issued check). Sensible then sells securities to ensure that there is cash to cover any anticipated QCDs. We encourage clients to mail the check to the charity with a letter that includes their name and address.
Each investor has different needs. The advisors at Sensible are happy to discuss your alternatives and help put your choices into place. In my next article, I’ll delve into the advantages and disadvantages of QCDs.
The information in this article is not intended as tax advice. Sensible Financial does not provide accounting or tax services. You should consult your tax professional before making any decisions.