The ability to make a “Qualified Charitable Distribution” (QCD) from an IRA was first created in the Pension Protection Act of 2006. However, the Tax Cuts and Jobs Act of 2017 (TCJA) made QCDs appealing in record numbers. Anyone who had an IRA and reached age 70½ in 2018 needed to consider carefully how he or she made charitable gifts.
While charitable deductions were not directly affected by TCJA, the potential tax benefits were eliminated for many people because of the higher standard deduction. Making charitable gifts through a QCD was a way to keep the tax benefits of a donation.
Qualified Charitable Distribution Rules
Let’s review some of the core requirements. Under the QCD rules1, the IRA owner must have attained the age of 70 ½ before they can make a QCD. An IRA owner who reaches age 70 in February will be 70 ½ during the year. They cannot make the QCD until August when they actually reach the age of 70 ½. A beneficiary of an inherited IRA is eligible to make a QCD once the beneficiary is at least age 70 ½2.
There is a maximum QCD dollar amount of $100,000 per year for any individual. This annual limitation is on a per-taxpayer basis (not per IRA). A married couple can each donate up to $100,000 per year from their own IRAs.
QCDs cannot be made from SEP IRAs, SIMPLE IRAs, or from any type of employer retirement plan. Oddly enough, a QCD is permitted from a Roth IRA. But, most distributions from a Roth IRA are already tax-free. Therefore, it generally would not make sense to make a QCD from a Roth IRA.
QCD rules stipulate that distributions must go to a public charity3. Private foundations and donor-advised funds do not qualify. Like any other charitable deduction, the rules specify that the IRA donor cannot receive any kickbacks or other “quid pro quo” benefits. Therefore, donations to any “split-interest charitable trust” like a charitable remainder trust or a charitable lead trust are also not eligible to receive QCD donations.
Normally when a distribution is made from an IRA containing pre-tax and after-tax dollars, the allocation is made pro-rata. This means part of the distribution is pre-tax and part after-tax based on the amount of each type of dollars in the account.
This does not apply in the case of a QCD. QCDs are deemed to come from the taxable portion of the account first, ensuring the most favorable treatment.4
To properly complete a QCD:
- The IRA owner must be at least age 70 ½ on the date of distribution
- The distribution comes from the IRA custodian and the check is made payable directly to the charity
- The IRA custodian sends the check directly to the charity
- Ask the charity to send a gift acknowledgment form so you have proof of the gift for your tax records
- The IRA custodian reports the distribution from your IRA but doesn’t specify it as a QCD. On tax Form 1040, the total distribution is reported on line 4a. The taxable amount is reported on line 4b and “QCD” is noted next to the box to indicate a qualified charitable distribution. If the entire amount was given to charity, write $0 and “QCD” on line 4b.
The Benefit of a QCD From an IRA
The biggest benefit of a QCD is the distribution comes out of the IRA without the tax consequences that would otherwise apply. The QCD is deemed to satisfy the required minimum distribution (RMD), even though the QCD is not taxable. Given the requirement that an IRA owner must be at least age 70 ½ to do the QCD, they will also have at least some RMD due for that tax year.
If Drawing Social Security Benefits
The ability to satisfy RMD requirements without first showing up as income can be significant for taxpayers drawing Social Security benefits. Social Security recipients with incomes above the base amounts of $25,000 (single filer) and $32,000 (joint filer) are subject to federal income tax on their Social Security benefits. For joint filers with incomes above Modified Adjusted Gross Income (MAGI)5 of $44,000, up to 85% of benefits can be taxed. The trigger point for taxing benefits is based on MAGI. Making a QCD lowers MAGI and could potentially lower or eliminate the taxation of Social Security.
If You’re on Medicare
It can also be significant for those on Medicare. In 2019, the standard monthly premium for Medicare Part B is $135.50; however, a surcharge applies to seniors with higher income. The surcharge starts at MAGI of $85,000 (singles) and $170,000 (marrieds) and can be as large as $460.50 a month for each person in the household on Medicare! Making a QCD could lower MAGI enough to stay out of the Medicare surcharge range.
Careful planning could be the key to a lower tax bill in 2019 and lower Medicare premiums in subsequent years. Normal RMDs increase Adjusted Gross Income (AGI) (and MAGI) which may increase tax brackets, increase Medicare premiums, and/or cause a greater portion of Social Security benefits to be taxed.
Consult with a tax professional and/or financial adviser to determine if gifting through a QCD makes sense. There may be factors other than taxes to be considered.
- An IRA owner must have attained the age of 70 ½ before they can make a QCD.
- QCDs cannot be made from SEP IRAs, SIMPLE IRAs, or from any type of employer retirement plan.
- QCD rules stipulate that distributions must go to a public charity.
1 IRC Section 408(d)(8).
2 IRS Notice 2007-7, Q&A-37.
3 Public charities are defined in IRC Section 170(b)(1)(A).
4 IRC Section 408(d)(8)(D).
5 Modified adjusted gross income represents your adjusted gross income with the addition of certain deductions and includes interest from tax-exempt bonds.