Poverty and young girl

Qualified Charitable Distributions

Many people feel good about giving money to charities.  They also like to get the corresponding tax deduction.  Unfortunately, fewer people are taking advantage of the tax benefifs of charitable giving since the Tax Cuts and Jobs Act took effect in 2018.  This is why I wanted to shed some light on Qualified Charitable Distributions.  QCDs, as they are known, are one of the most frequently missed opportunities I see when reviewing client’s tax returns.

Most people are surprised to find out that just over 10% of taxpayers still itemize, which means almost 90% are taking the standard deduction. There is a lot to like about the standard deduction. It’s easy to understand, results in less “funny business,” and creates less work for everyone in the event of an audit. One of the few downsides of the standard deduction is you do not get to write off your donations to charity. Luckily, there is a work-around that I feel needs a bit more publicity…(QCDs).

First, a little background…

Every taxpayer gets to deduct the standard deduction or all of their itemized deductions. One of the biggest changes to the tax code over the last 30 years was an almost doubling of the standard deduction under the Tax Cuts and Jobs Act, which became effective in 2018. The standard deduction for 2022 starts at $12,950 per person. However, your standard deduction may be a bit higher because you get an additional $1,750 if you are blind, or over the age of 65 and single, or $1,400 per spouse if you are over 65 and married. Therefore, a 65-year-old couple would have a standard deduction of $28,700 and would only itemize if they had more than that in itemized deductions. Donations to charity are normally an itemized deduction, which you lose if you are taking the standard deduction.

Standard Deduction Plus Charitable Deductions?

You can take the standard deduction and still deduct the money you give to charity as long as the funds are distributed directly from your IRA and certain conditions are met. This is known as a Qualified Charitable Distribution (QCD). There are a few important details:

  • You can only do this if you are 70½ years old or older. This seems strange because the Required Minimum Distribution (RMD) age is now 72, but QCDs are still allowed at the previous RMD age of 70½.
  • The money must be sent from your IRA custodian (e.g., TD Ameritrade, Schwab, Fidelity) directly to the charity. If you receive the funds, then you will be taxed on them.
  • The QCD will count toward satisfying your RMD for the current year.
  • There is a limit of $100,000 per year, per person.
  • You cannot receive any gift, product, or service from the charity in exchange for the donation. This could make the entire contribution ineligible for QCD treatment.

Some Charities Do Not Qualify

Your chosen charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions.

Some charities do not qualify for QCDs. These include:

  • Private foundations
  • Donor-advised funds
  • Supporting organizations: i.e., charities whose purpose is to support other tax-exempt organizations (usually other public charities).

Tax Reporting

Your IRA custodian will issue a Form 1099-R that shows the total distributions from the IRA during the tax year. It won’t distinguish between QCDs and other distributions. Therefore, you need to report the full amount of the IRA distributions on line 4a of your Form 1040. Then, subtract the QCDs and only report the taxable amount of distributions on line 4b. The taxable amount may be zero if you donated all of your IRA distributions directly to charity.

Next to line 4b, you should write “QCD” to let the IRS know you excluded part of the distributions as QCDs.

If you are not preparing your own tax return, tou need to tell your CPA about the QCDs so they will know to take the deduction. Your CPA will not know that any of your IRA distributions went to charity if you just hand over your 1099s. I also recommend keeping a record of your donations just in case you get audited, which is pretty unlikely, but could happen.

The effect of the QCD is an “above the line” deduction. This means the QCD reduces your Adjusted Gross Income (AGI), which is great because your AGI is used to determine if you qualify for various benefits or tax credits, and it is also used to determine whether you will owe additional Medicare premiums (IRMAA) levied on high income seniors.

Final Thought

The best reason to give to charity (by far) is to support causes you care about. The second-best reason is for the tax deduction. The QCD accomplishes both.

Email me with any questions.