Late in 2015, Congress made the Qualified Charitable Distribution (QCD) provisions permanent, so that charitably minded clients can direct up to $100,000 in IRA funds per year to charity and reap the tax benefits even post-tax reform. The $100,000 cap is a per-person cap, so that married taxpayers can direct up to $200,000 to charity each year so long as each spouse has their own IRA.
If a client is over age 70½, a transfer made directly from the client’s IRA to a qualified charity (generally, 501(c)(3) organizations, but not donor-advised funds, foundations or charitable gift annuities) will count toward the client’s required minimum distribution and is entirely nontaxable. Beneficiaries who are over age 70½ are also permitted to make QCDs, so long as the beneficiary also meets all other basic requirements for the transaction.
QCDs can only be made from a traditional IRA or an inherited IRA. Tax-preferred accounts such as SIMPLE IRAs, SEP IRAs and Roth IRAs generally do not qualify, although QCDs can be made from SEP IRAs and SIMPLE IRAs that are not ongoing. To be ongoing, an employer must have made a contribution to the SEP or SIMPLE IRA for the plan year when the contribution would be made.
In order to have the distribution counted as a QCD, the client must have the amount transferred directly to charity and report that amount on his or her tax return as a QCD. The full amount is reported on the client’s Form 1040 under IRA distributions, but the client enters “0″ if the entire amount was a QCD (noting “QCD” next to that line).
As with any other charitable contribution, the client should obtain substantiation from the charity that confirms the transaction from the charity. The documentation should state that no goods or services were provided in exchange for the donation. It’s important that the client save all documentation relating to the transaction.
Reaping the QCD Tax Benefits
The QCD provides a valuable tax benefit for charitably minded clients who are unable to itemize because of the higher standard deduction post-reform. Clients who reached age 70 ½ during 2019 can take the QCD by Dec. 31— and clients whose first RMD was not due until April 1, 2019 (i.e., clients who turned age 70 ½ in 2018) — can still take a QCD for 2018 by year-end.