Qualified Charitable Distributions and Related Tax Code

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Most retirement funds mandate a required minimum distribution (RMD) once you turn 73. If the account owner doesn’t take the RMD, they are subject to a penalty. An RMD can put an individual in a higher tax bracket and affect Social Security and Medicare benefits.

But there is a way to lower the tax liability through a qualified charitable distribution (QCD). But what exactly is a QCD, and how do they work?

Repercussions of an RMD

It’s essential to first understand the consequences of an RMD on you. It increases your taxable income. But it can also have other repercussions.

An RMD can trigger “phaseouts,” for example, which limit or eliminate certain tax deductions, including personal exemptions and itemized deductions.

It could also increase Medicare premiums and affect Social Security benefits.

A QCD can help eliminate or minimize these problems.

How a QCD Works

A QCD is also referred to as an Internal Revenue Service (IRS) charitable rollover or individual retirement account (IRA) charitable distribution. You can minimize the RMD’s effect by a direct transfer of funds to a qualified charity from the IRA.

The transfer cannot go to you to disperse the funds to charities. It must go directly to charity. You can designate multiple charities, but you are limited to $105,000 for 2024. It’s attached to the rate of inflation, so it changes yearly.

Qualified charitable distributions lower taxable income, so both higher taxes and phaseouts can be avoided.

Because QCDs reduce the IRA balance, they reduce RMDs in future years. They are not counted toward the maximum deductible for those who itemize donations on their taxes. The $105,000 is above those limits.

You can give a bigger charitable gift than if you just had donated assets or cash.

How to Make a QCD

Qualified charitable distributions can be made directly to a charity from a:

• traditional IRA
• inherited IRA
• inactive simplified employee pension (SEP)
• inactive savings incentive match plan for employees (SIMPLE)

Remember that inactive SEPs and SIMPLEs are retirement accounts that no longer receive employer contributions.

Who Can Make a QCD?

There is a minimum age for those people making a QCD. You must be 70½ years old. Even though the RMD age is 73, you can take disbursements from an IRA sooner if you wish and take advantage of the QCD.

The $105,000 is the sum taken for all the IRA in a calendar year. You can make several small donations or one large one.

For a married couple, each spouse can make a $105,000 QCD from all the IRAs combined. So, potentially you and your spouse could make a $210,000 QCD.

Employer-Sponsored Plan Excluded

Except for inactive SEPs and SIMPLEs, QCDs are only permitted from IRAs. They are not permitted from an employer-sponsored plan. This includes plans 401(k), 403(b), and 457(b)

If you try to take a QCD from one of these plans, it will be counted as taxable income.

QCD First-Dollars-Out Rule

To ensure you receive a QCD tax benefit, you must coordinate the QCD with the RMD, or the QCD will be treated as taxable income.

The first dollars withdrawn from an IRA in any year, the owner is subject to the RMD, satisfies the RMD. This is the first-dollars-out rule, which creates a timing oddity for a QCD.

Timing a QCD

It’s customary for many people to take their RMD early in the year or in monthly/quarterly payments. But if you want to reduce your tax liability by lowering your income, you must first make a QCD. Once you have made your QCD, then take the RMD.

This will avoid any conflict with the first-dollars-out rule.

You cannot take your RMD and then retroactively decide to make a QCD. If you do this the QCD will be counted as an additional distribution, and you will be taxed on it.

And be aware that you can’t receive the RMD and then decide to donate the funds to charity. If the disbursement isn’t made directly to the charity from the fund, it also counts as taxable income.

QCD Tax Requirements

A QCD can only be donated directly to a qualified charity. It must be a 501(c). So, a private foundation or donor-advised fund is not eligible for a QCD.

You also must not have received anything from the donation. For example, you can’t accept tickets to a function or entry into a golf tournament.

A QCD consists of only pretax IRA funds. It is an exception to the pro-rata distribution rule and, therefore, distributed from pre-tax funds first.

Report QCD Correctly to the IRS

If you’ve made a QCD, your IRA trustee will provide you a Form 1099-R early in the filing year. This form will show any IRA distributions made in the tax year, including the QCD.

From there, you will list your QCD on line four. However, read the instructions from the IRS or speak with a tax expert to ensure you report it correctly.

Receipt From Charity

You’ll need a receipt from the charity to ensure proof of the donation. It is also wise to ask for a copy of the check (if a check was written and not directly transferred).

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