Five Common Mistakes When Taking Qualified Charitable Distributions From Your IRA - Rodgers & Associates

Five Common Mistakes When Taking Qualified Charitable Distributions From Your IRA

Qualified Chari­table Distri­b­u­tions (QCDs) can be a valuable way to give to charities you want to support while helping you fulfill your Required Minimum Distri­b­ution (RMD). This strategy can reduce taxes and help provide some flexi­bility in your overall tax planning. Below we have outlined five common mistakes to avoid when taking QCDs.

  1. Not identi­fying the 70 ½ year age eligi­bility
    When the required minimum distri­b­ution for IRA owners was 70 ½, many people assumed this was directly connected to the eligible age for qualified chari­table distri­b­u­tions (QCDs). But when the SECURE Act was passed in 2019, it delayed the IRA required minimum distri­b­ution age to 72— but kept the eligible age for QCDs at 70 ½.

    To be clear: QCDs are not allowed until at least age 70 ½. If you are 70 and your birthday is on March 20, you would not be eligible for QCDs until September 20.

  2. Not distrib­uting money to a valid 501(c)(3) charity
    QCDs must be distributed to a 501(c)(3) charity. There are many entities you might assume to be chari­table organi­za­tions that are not—such as 501(c)(4) “social welfare” groups. To be sure a charity qualifies, verify directly with the charity or use websites such as www​.guidestar​.com, www​.chari​ty​nav​i​gator​.org, or www​.chari​ty​watch​.org.

  3. Not receiving a confir­mation letter from the charity that no goods or services were received
    One of the quali­fi­ca­tions for QCDs to be valid is that no goods or services can be received for your cash gift. The IRS requires the charity to mail you a confir­mation letter stating this. Be sure to keep this letter with your tax documents to substan­tiate your gift

  4. Not deducting the QCD amount from the reported 1099‑R income
    You might assume that your financial custodian will subtract QCD dollars distributed to charity from the taxable income on your 1099‑R tax form. However, custo­dians are not required to do so: it is your respon­si­bility to reduce your 1099‑R taxable income by the dollars distributed to charity.

    If you are having a profes­sional prepare your taxes, they will have no way of knowing you gave money to a chari­table organi­zation from your IRA unless you notify them. Review your tax return to make sure the QCD amounts have lowered your taxable IRA distribution—and confirm that the taxable amount is correct. You should also verify the letters “QCD” appear next to the taxable amount on your 1040 tax form.

  5. Not under­standing the benefits of reducing taxable income
    Making chari­table gifts from your IRA instead of your checkbook can be an excellent tax management strategy. Doing so helps you to fulfill your required minimum distri­b­ution while reducing taxable income dollar for dollar. With lower taxable income, you may be able to keep more of your Social Security from being taxed, avoid increased Medicare premiums, and allow for possible Roth contri­bu­tions and other tax credits that phase out when taxable income is too high.

If you’d like to learn more about QCDs you can find our other related articles here.