These types of distributions are called Qualified Charitable Distributions (QCDs). And by making a QCD, donors can achieve their annual required minimum distribution without creating taxable income, as well as benefit your organization at the same time!
QCDs provide donors with tax benefits even if they are not itemizing, since they avoid paying federal income taxes on the IRA distribution. Also, since the QCD does not count as income, it may reduce their annual income level. This may also help lower their Medicare premiums and decrease the amount of Social Security that is subject to tax. Please keep in mind that if the donors do itemize, they are not able to also take a charitable deduction on the distribution.
How QCDs Works
Let’s look at an example:
Robert is age 71. He has $1,000,000 in an IRA, and he doesn’t need his entire minimum distribution ($37,736 based on the IRS required minimum distribution worksheet) for the year. Robert and his wife Sylvia are active philanthropists and want to support the ABC Organization. Robert and Sylvia’s tax advisor suggests that they make a QCD to the ABC Organization for the amount in excess of what they need for the coming year. As a result, they make a QCD to the ABC Organization for $20,000, and they distribute the remaining balance to themselves. The full $20,000 counts towards the annual minimum distribution, and they only pay taxes on the $17,736 distributed to themselves. Plus, they make a huge impact on their community by supporting the ABC Organization!
Frequently Asked Questions
How do donors make a QCD?
To make a QCD, donors should contact their IRA custodian. Typically, they are required to fill out an IRA withdrawal form. These forms usually ask for the charity’s name, the amount to be distributed, and the charity’s address. They may also request the charity’s EIN.
When do donors need to make a gift by to qualify for the minimum distribution?
To qualify for the minimum distribution, organizations must receive gifts by December 31 each year.
What is the maximum QCD donors can make that will qualify towards their required minimum distribution?
$100,000 in total for all QCDs made in one year.
How can a donor give more than $100,000 per year?
If the donor has a spouse (as defined by the IRS) who is 70 ½* or older, and the spouse also has an IRA account, they can each give up to $100,000 for a combined total impact of $200,000.
Can a donor make a QCD from their 401(k)?
No, QCDs can only be made from IRAs. It’s possible donors could roll-over 401(k)s and other funds (e.g. pension, profit sharing, or 403(b) plan) into an IRA and then make a QCD, but they should consult with their plan administrator.
Can a QCD be used as part of a life-income gift, such as a charitable remainder trust or gift annuity?
May donors receive anything of tangible value for a QCD?
No, QCD donors are not allowed to receive anything in return, such as event tickets.
If you have any questions regarding QCDs, contact a Clark Nuber professional.
*Starting January 1, 2020, the mandatory age changed. If you were not 70 ½ before December 31, 2019, the age for beginning mandatory distributions has changed to age 72 for IRA owners.
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