Elder Law & Estate Planning Center
Jay H. Krall, Attorney at Law
6739 Falls of Neuse Road, Raleigh NC 27615
Qualified Charitable Distributions (“QCDs”) from IRAs will become the charitable-giving strategy of choice for IRA owners over 70 ½ who will no longer itemize deductions. QCDs don’t create a charitable deduction. Instead, the amount of the QCD is excluded from the donor’s gross income, allowing the donor to avoid paying income tax on 100% of the charitable distribution.
The QCDs rules are fairly straightforward. Beginning on the date when an IRA owner reaches age 70 ½ (but see Q&A #1 in Appendix 1), the owner can direct her IRA custodian to make a distribution from her IRA, not to exceed $100,000 in each year, to one or more qualified nonprofits (see Q&A #4 in Appendix 1). These annual distributions count toward the donor’s Required Minimum Distribution (“RMD”) for the year of the distribution. Because QCDs are not included in the IRA owner’s gross income, the donor gets a dollar-for-dollar tax benefit, regardless of whether or not the IRA owner itemizes deductions.
There are many other tax-related benefits of QCDs. In the past, some clients and their advisors have downplayed the tax benefit of QCDs due to the mistaken belief that simply making the IRA distribution to themselves and then donating the amount of that distribution to charity yields the same tax benefit. That belief is wrong. In addition to providing a dollar-for-dollar tax benefit for non-itemizing donors, there are at least 7 additional ways that excluding the IRA distribution from gross income with a QCD could save taxes as compared to a “take the distribution—make a donation” strategy. Excluding the IRA distribution from gross income could:
Reduce the amount of your Social Security income that is taxable;
Help low-to-moderate income earners avoid capital gain tax on the sale of appreciated assets by keeping their adjusted gross income (AGI) below the top of the 0% capital gain tax bracket;
Allow high-income earners (modified adjusted gross income (MAGI) near or above $200,000 for single taxpayers and near or above $250,000 for married couples) to avoid or reduce the 3.8% Net Investment Income Tax (the “Medicare Surtax”);
Lower the threshold for deductibility of medical and dental expenses (currently set at 7.5% of AGI for this year and next, then reverting to 10%);
Reduce the cost of Medicare Part B and Part D premiums;
Avoid the 60% of AGI limitation (up from 50%) on donations of cash to nonprofits;
Reduce state income taxes where state taxes are based on the amount of AGI reported on the taxpayer’s federal tax return (as is the case in North Carolina).
Footnote One: It’s likely that more donors would already be taking advantage of QCDs were it not for the on-again-off-again history of this legislation. QCDs came into being as part of the Pension Protection Act of 2006, but under that Act, the QCD provision was set to expire at the end of 2007. Congress reinstated the provision for 2008 and 2009, but, not until October of 2008. After 2009, reinstatements were done retroactively very late in the year, (or as late as January of the year following expiration), making it very difficult to incorporate QCDs into a taxpayer’s charitable planning. Finally, in December of 2015, Congress made QCDs a “permanent” part of the tax code.
Footnote Two: Distributions from IRAs are excluded from the definition of Net Investment Income (NII). However, the NII Tax applies to the lesser of the taxpayer’s NII and the amount by which the taxpayer’s modified adjusted gross income (MAGI) exceeds the applicable threshold. Thus, if the taxpayer’s MAGI is the lesser of the 2 numbers, including an IRA distribution in gross income will increase the amount of MAGI that is subject to the Tax.
Questions & Answers About Creating a QCD
Question 1. Will a transfer made on any day of the year in which I turn 70½ qualify as a QCD?
Answer. No. A donor’s first QCD cannot be made until the date that is 6 months after the IRA owner’s 70th birthday. For example, if an IRA owner was born on June 30th, the QCD will not be qualified if made before December 30th of that year. This is confusing because the “required beginning date” rule for taking RMDs from an IRA allows the RMD to be taken on any day of the year in which the IRA owner turns 70 ½, or at the latest, by April 1st of the following year.
Question 2. Is there a limit to the amount that I can exclude from gross income for QCDs made in a year?
Answer. Yes. The aggregate amount of QCDs per IRA owner per year cannot exceed $100,000.
Question 3. Both my spouse and I are over age 70 ½ and we each have IRAs. May we both make a Qualified Charitable Distribution in the same year?
Answer. Yes. Both you and your spouse may make a QCD from your IRAs (if all other requirements are met) even if you file a joint tax return.
Question 4. Can I make a QCD to any charitable organization that is eligible to receive charitable donations that, otherwise, would be deductible for income tax purposes?
Answer. No. QCDs cannot be made to Private Foundations, Supporting Organizations or Donor Advised Funds. Also, QCDs cannot be made to trusts known as “split interest” trusts, such as Charitable Remainder Trusts and Charitable Lead Trusts.
Question 5. I am the beneficiary of an “inherited IRA.” Can I make a QCD from that account if I am over age 70 ½ ?
Answer. Yes. A QCD can be made from an IRA established for a beneficiary after the death of the original IRA owner, as long as the beneficiary has attained age 70 ½.
Question 6. Can I make a QCD from any type of IRA?
Answer. Generally, yes. QCDs can be made from Roth IRAs and from SEP and SIMPLE IRAs, as long as the SEP and SIMPLE IRAs are not “ongoing,” meaning that an employer has not made a contribution to the SEP or SIMPLE IRA for the plan year ending with or within the IRA owner’s taxable year.
Question 7. Can I deduct the amount of my QCD on my tax return as a charitable donation?
Answer. No. Since QCDs are excluded from gross income, the IRA owner has, in effect, already received a charitable deduction for the amount of the QCD.
Question 8. If I ask my IRA custodian to send me a check made payable to a qualifying charitable organization for me to deliver, will the distribution be considered a direct payment by the IRA custodian to the charitable organization?
Answer. Yes. A check from an IRA made payable to a charitable organization delivered by the IRA owner will be considered a direct payment by the IRA custodian to the charitable organization. Many IRA custodians actually prefer this method of delivery as compared to the custodian mailing the check.
Question 9. Does the charity have to cash my QCD check by December 31st or does it just have to be physically delivered or postmarked by the end of the year?
Answer. Since a QCD involves 2 actions—1) taking a RMD from an IRA; and 2) making a charitable donation—the separate legal requirements for documenting both actions must be considered. A 1099-R issued by the donor’s IRA custodian is sufficient evidence that that the donor’s RMD was timely made. Documenting the charitable donation is more complicated. The regulation governing the timing of deductible gifts to charities (26 CFR 1.170A-1(b)), states that “the unconditional delivery or mailing of a check which subsequently clears in due course” is considered to be an effective contribution “on the date of delivery or mailing.” Based on that regulation alone, a QCD check delivered or mailed to a charity by year-end should qualify as a QCD for that year, even if the check isn’t cashed by the charity until the following year. However, as noted by the IRS in Publication 590-B, the IRA owner must receive from the charity a written acknowledgment that meets the same requirements for claiming a charitable deduction for any other donation of $250 or more. That raises the question of whether the charity which receives your QCD check after December 31st will state in its acknowledgement that the donation was made in the year of mailing or in the year of receipt. To be safe, the charity should receive and cash the check before year end and provide an acknowledgement of receipt bearing the date of receipt.
Question 10. Will my IRA custodian notify the IRS on Form 1099-R that the distribution from my IRA qualifies as a QCD instead reporting the distribution as taxable?
Answer. No. Unfortunately, there is no box on Form 1099-R for your custodian to notify the IRS that your IRA distribution is a QCD. It will be reported as a taxable distribution! You are responsible for informing the IRS on Form 1040 (see Figure 2 below) that the distribution qualifies as a QCD by following these steps: 1) On line 15a, enter the amount of the distribution (from Form 1099-R); 2) enter “zero” on line 15b for the taxable amount of the distribution; and 3) write “QCD” on line 15b as indicated below.
Figure 2: Screen Shot of IRS Form 1040 (2017). Please note: Line "15a" on the screen shot of the 2017 Form 1040 appears as line “4a” on the 2018 Form 1040 published by the IRS in June of 2018.