by Brooks Mosley, CPA
When planning your IRA withdrawal strategy, you may want to consider making charitable donations through a Qualified Charitable Distribution (QCD).
A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying your Required Minimum Distribution (RMD) for the year, if certain guidelines are met.
In addition to the benefits of giving to charity, a QCD excludes the amount donated from taxable income, unlike regular withdrawals from an IRA.
You must be 70 ½ or older to be eligible to make a QCD, and the donation must be made to a 501(c)(3) organization. A QCD is reported as a distribution on IRS Form 1099-R for IRAs. For the funds to be counted toward your RMD for the year, you must complete the QCD before the RMD deadline, typically 12/31.
For example, Mary Jones uses part of her RMD from her IRA to fund a $10,000 donation to a non-profit organization. Her entire RMD for the year is $25,000. Therefore, $15,000 is taxable. The contribution from Mary’s IRA must be made directly from the financial institution that holds Mary’s IRA to the non-profit prior to December 31st.
Many people do not fully utilize this option or do not report the charitable distribution correctly on their tax returns if they do. When you receive your 1099-R for your IRA, the charitable contribution will be reported as a normal distribution. Download this sample tax return that demonstrates the proper way to notate the charitable contribution. Please note that the entire amount distributed from the IRA is reported on line 4a, and the taxable portion (excluding the QCD amount) is reflected to the right on line 4b.
We hope some of you receiving this newsletter will benefit from the information and take advantage of the opportunity to contribute to the 501(c)(3) organization of your choice.