Generally, traditional IRA distributions, whether as a required minimum distribution (RMD) or other distribution, are taxable income in the year you receive them. However, there is an exception to this rule that may be advantageous if you are charitably minded and need a tax break.
A Qualified Charitable Distribution (QCD) is an otherwise taxable distribution from your IRA or inherited IRA (other than an ongoing SEP or SIMPLE IRA) made directly to an organization eligible to receive tax-deductible contributions sometimes called a qualified charity. You must be 70 ½ when the distribution is made in order for it to be eligible as a QCD.
A QCD counts toward your required minimum distribution and can be used to satisfy all or part of it. For example, if your 2022 RMD is $15,000 and you designated $5,000 as a QCD to a qualified charity, you would still have to take an additional $10,000 distribution to satisfy your RMD. Alternatively, you could designate the entire $15,000 as a QCD to one or more qualified charities and your RMD will be satisfied. Additional distributions beyond your RMD can always be taken whether they are QCDs or not.
However, the maximum annual exclusion for QCDs is $100,000 per person. Anything over that amount is included in income just like any other distribution. If you and your spouse file a joint return, you both can both have exclusions up to $100,000 each.
You will receive a Form 1099R for the calendar year in which the QCD is made. It is important to note this distribution will be reported on your 1099R as a regular distribution not as a charitable distribution. More specifically, there is no way for IRA providers to indicate on the 1099R that your distribution went to a charity. Thus, you still need a receipt or some other type of acknowledgment from the charity to verify the donation. If you use a professional tax preparer, be sure to provide both pieces of information so it is reported correctly on your return.
So what’s the advantage of using QCDs?
Any IRA distribution that is a QCD is not included in income. However, you cannot also take a deduction for the charitable contribution. Therefore, if you do not have enough deductions to itemize and use the standard deduction instead, a QCD can lower your overall taxable income without using deductions.
Beware though if you are over age 70 ½ and still contributing to your IRA. In that case, any deductible IRA contribution will offset any subsequent QCD up to the amount of the deductible contribution. If you still want to do both in the same year, consider making your contribution to a ROTH IRA instead.
IMG is always available to help with your IRA QCD distributions and will work with your tax advisor to help determine your overall tax strategy. Please contact us if you would like to discuss further.
Questions? Contact Melissa at 563.388.2580.