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Top 10 Rules to Know About Qualified Charitable Distributions

If you are an IRA owner interested in donating to charity, a qualified charitable distribution may be an option. These 10 rules outline how a QCD should be done.

Arguably, one of the biggest changes to the tax code in the Tax Cuts and Jobs Act of 2017 was the doubling of the standard deduction. The Joint Committee on Taxation estimates that nearly 90% of taxpayers are likely to take the standard deduction instead of itemizing. The decision not to itemize means that charitable giving doesn’t seem like such a tax break.

But if you are over 70 1/2, qualified charitable distributions (QCDs) can be a favorable way to make donations to charities, because a distribution that meets the requirements as a QCD is excluded from gross income (so it’s nontaxable). Here are 10 features and requirements that apply to QCDs.

1. QCDs have a dollar limit 

You can make a QCD of up to $100,000 for a calendar  year. For married couples, each spouse is subject to a  separate $100,000 limit, leading to a total of $200,000  for a married couple. 

2. December 31 deadline 

A distribution must be processed by the end of the year  to be considered a QCD for that year. All distributions  processed between January 1 and December 31 of a  calendar year can be treated as QCDs for that year, as  long as they meet other requirements. 

3. A 70½ age minimum 

The account owner must be at least age 70½ on the  date the QCD is processed. According to the tax code,  you reach age 70½ six months after the date you turn  age 70. Distributions processed before then are not  eligible to be treated as QCDs. 

4. They can only be made from IRAs 

QCDs can only be made from IRAs, including inherited  IRAs. QCDs cannot be made from SEP and SIMPLE IRAs  that are ongoing—you receive an employer contribution  for the plan year within the tax year in which you make  the distribution. 

If you want to use amounts held in an employer sponsored retirement plan to make a QCD, you must  first roll over the amount from the plan to an IRA. Then  the QCD can be made from the IRA. 

Of course, the amount must be eligible for rollover  to be considered a valid rollover to the IRA. Amounts  not eligible for rollover include required minimum  distributions (RMDs). Therefore, any RMD due from the  plan for the year must be distributed to you before the  rollover contribution is made from the plan to the IRA. 

5. QCDs must be paid to the charity 

A distribution made to you is not treated as a QCD.  Instead, the distribution must be made payable to the  charity. However, distributions made in the form of a  check payable to the charity can be delivered to you,  and you can then deliver the check to the charity.

6. The charity must be ‘eligible’ 

For this purpose, an eligible charity is one that meets  the definition under Internal Revenue Code (IRC)170(b) (1)(A), other than an organization described in IRC  509(a)(3) or a donor-advised fund. 

7. QCDs can be used to satisfy RMDs 

A QCD can be used to satisfy an RMD if the RMD is  not distributed before the QCD is processed. But any  amount processed before the QCD is treated as an RMD  up to your RMD due for the year, and is therefore not  eligible for rollover. 

Example 1: QCD is RMD 

Jane’s RMD for the year is $10,000. In the first week  of December, Jane (age 74) submitted instructions to  her IRA custodian to process a QCD for $20,000 from  her IRA. At that time, Jane had not yet made any other  distributions from her IRA for the year. Even though the $20,000 is paid to the charity and not  Jane, $10,000 of the $20,000 QCD is counted towards Jane’s RMD for the year. As a result, Jane is not required  to distribute any additional amount for the year for  RMD purposes. 

If Jane’s QCD was for $8,000, she would need to  distribute only $2,000 to satisfy her RMD ($8,000 QCD  +$2,000 regular distribution= $10,000 RMD). 

Example 2: QCD is not RMD, and RMD is not eligible  for rollover 

Tom’s RMD for the year is $10,000. During the first  week of December, Tom (age 75) instructed his IRA  custodian to process a QCD for $20,000. He had already  distributed $10,000 during the last week of November. 

When Tom heard that a QCD can be used to satisfy  an RMD, he wanted to roll over the $10,000 that he  distributed in November. However, the amount was not  eligible for rollover because the first distribution made  during an RMD year goes toward satisfying the account  owner’s RMD until the RMD is satisfied, which means  that the $10,000 distributed in November is Tom’s RMD.  Had Tom taken that $10,000 distribution after the QCD  was processed, the amount would have been eligible  for rollover. 

8. QCDs not subject to pro-rata rule 

Generally, an IRA distribution includes a prorated  amount of pretax and after-tax funds, if your IRA  balance includes basis amounts. Basis amounts come  from nondeductible contributions and rollovers of  after-tax amounts from employer-sponsored retirement  plans. 

For example, assume that you have one traditional  IRA with the balance of $100,000, and $20,000 of that  represents basis. If you take a distribution of $80,000  from the traditional IRA, the pro-rata rule would apply  as follows $64,000 of pretax assets would be taxable and $16,000 of after-tax assets would be nontaxable,  leaving a balance of $20,000. The pretax amount would be $16,000 and the basis would be $4,000. 

One of the exceptions to this pro rata rule is a QCD.  Under this exception, a QCD is deemed to come first  from the taxable amount. Using the example above,  if the $80,000 distribution is a QCD, then that entire  amount would be attributed to the pretax balance,  albeit nontaxable because it is a QCD. As a result, the  remaining $20,000 would represent basis. 

Note: All of your traditional, SEP, and SIMPLE IRAs are  aggregated and treated as one for this purpose. 

9. Not subject to tax withholding 

IRA distributions are subject to income tax withholding.  Under the withholding requirements, an IRA owner  can request to have 10% or more withheld for federal  income taxes plus any state tax. If you fail to make a  tax withholding election, the IRA custodian/trustee is  required to withhold 10% for federal income taxes. 

One of the exceptions to this withholding rule is a  QCD. Therefore, whether or not the IRA owner makes  a withholding election, the IRA custodian must not  perform any tax withholding on a QCD. 

10. QCDs are reported as regular  distributions 

IRA custodians/trustees are required to report QCDs as regular distributions. Despite the fact that a QCD is nontaxable, the IRA custodian must report a QCD  as a taxable distribution on IRS Form 1099-R. Your  tax preparer is responsible for reporting the QCD as a  nontaxable distribution on your return 1040.

If you submit a distribution request that is intended to  be a QCD, you should notify your IRA custodian of your  intention. This will help the IRA custodian to ensure that  the amount satisfies the QCD requirement, including  that amount that is made payable to the charity. 

However, it is your responsibility as the IRA owner to  ensure that the charity meets the requirement for being  an eligible charity under the QCD rules. In addition, you  must ensure that you meet the age 70½ requirement  before the QCD is processed. 

If you are considering a QCD, you should consult with  a tax professional about whether or not it is the most  suitable option for making a donation. A CPA should  also be able to determine if it makes better tax sense to  donate other assets. 

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