Jay H. Krall, Attorney at Law
Making Qualified Charitable Distributions (“QCDs”) from IRAs is a great way to reduce your taxes while achieving your charitable giving goals. Unlike traditional gifts of cash or stock to charities, QCDs don’t create a charitable income tax 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, up to $100,000. QCDs have become very popular as a result of the “doubling” of the Standard Deduction under the Tax Cuts and Jobs Act of 2017, which, for many taxpayers, has eliminated the benefit of itemizing deductions, such as charitable donations.
The QCDs rules are fairly straightforward. Beginning on the date when an IRA owner reaches age 70 ½
(see Q&A #1 below), the owner can direct her IRA custodian to take a distribution from her IRA, not to exceed $100,000 in each year, payable to one or more qualified nonprofits (see Q&A #5). 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 benefits of QCDs. Some advisors have downplayed the benefits of QCDs due to the mistaken belief that simply taking the IRA distribution and then donating that amount 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 an IRA distribution from gross income could save taxes as compared to a “take the distribution—make a donation” strategy. Using a QCD to exclude the IRA distribution from gross income could:
- Reduce the amount of 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 10% of AGI);
- Reduce the cost of Medicare Part B and Part D premiums;
- Avoid the 60% of AGI limitation on donations of cash to nonprofits;
- Reduce state income taxes.
Questions & Answers About QCDs
Question 1. Can I make a transfer that qualifies as a QCD anytime during the calendar year in which I turn 70 ½?
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.
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. In addition, the recently enacted SECURE Act has added a further limitation. Under the SECURE Act, an individual with earned income can contribute to an IRA after turning 70 ½. The cumulative sum of those tax-deductible IRA contributions must be subtracted from the otherwise allowable $100,000 QCD amount for all future years.
Question 3. Under the SECURE Act I can delay taking my RMD until the year in which I turn 72, but the age for taking a QCD is still 70 ½. If I take a QCD at 70 ½, but don’t have a RMD in that year, can I use that QCD to reduce my future RMDs?
Answer. No. A QCD taken in a year in which no RMD is required cannot be “carried forward” to a future year to reduce or eliminate a RMD.
Question 4. 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 5. What qualifies a charitable organization as being eligible to receive QCDs?
Answer. QCDs must go to 501(c)(3) organizations.
Question 6. I am the beneficiary of an IRA that I inherited from my father. Can I take a QCD from that account if I am age 70 ½ or older?
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 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 100 % of 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. To be safe, the charity should receive and cash the check before year-end and provide an acknowledgment 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 of 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 that the distribution qualifies as a QCD by following these steps: 1) For example, if you withdrew $50,000 from your IRA and gifted the entirety to charity, on line 4a, enter the amount of the distribution (from Form 1099-R); 2) enter “zero” on line 4b for the taxable amount of the distribution; 3) write “QCD” on line 4b as indicated below.
[Excerpt from IRS Form 1040 for tax year 2019. Note: Form 1040 for tax year 2020 may differ.]
As a licensed attorney for more than 3 decades, Attorney Krall has helped thousands of individuals and families protect and preserve assets, reduce the cost and complexity of transferring assets to loved ones and create a charitable legacy. Attorney Krall is licensed to practice law in the State of North Carolina. While the information provided in this Article does not constitute legal advice, it is accurate with respect to North Carolina law. You are advised to seek competent legal advice from an attorney licensed in your state of residence.
Important Notice: The information provided in this Article does not constitute tax or legal advice and cannot be relied upon by any taxpayer in making decisions about charitable donations or any other tax or legal matter. Nothing in this Article implies or creates an attorney-client relationship between a reader and the author. Attorney Krall is licensed by the NC State Bar and not in any other state. To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this article was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from his or her tax adviser based on the taxpayer’s particular circumstances.
 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 NII Tax.