Qualified charitable distributions are withdrawals from an Individual Retirement Account (IRA) that are transferred directly to a qualified charity. IRA account holders who are 70 and a half or older can donate part or all of their IRA funds to charities.
Minimum Required Distributions
You must start taking required minimum distributions (RMD) from a traditional IRA when you reach age 72, or 70 and a half if you turned 70 and a half before December 31, 2019, even if you do not want or need the money at that time. These distributions are subject to income tax at ordinary rates.
How Qualified Charitable Distributions Can Help
Qualified charitable distributions count towards the minimum required distribution for the year. If you have to take RMDs but do not really want or need the money, qualified charitable distributions can be a good way to distribute the required minimum amount from your IRA and thus avoid the 50% penalty for not taking the required distributions. You will also avoid paying income tax on these funds, as they are considered a donation rather than income.
Eligibility Rules for Qualified Charitable Distributions
You must be at least 70 and a half when you make a qualified charitable distribution, depending on when you reached age 70 and a half. You can make a qualified charitable distribution in that year even if you are not required to start taking RMDs until age 72.
The funds must be transferred directly from the IRA custodian to the qualified charity, and “qualified” is an important word here.
The charity must be one that is recognized by the IRS. You cannot simply hand the money to a friend or neighbor. Qualified charities include 501(c)(3) nonprofit organizations and houses of worship. Qualified charitable distributions cannot be made to donor-advised funds or supporting organizations.
Impact on Adjusted Gross Income
Qualified charitable distributions can help keep your adjusted gross income and taxable income within the required thresholds, as income from the charitable distribution exceeds your Form 1040. This means you will report the full amount of the charitable distribution on Form 1040 in the designated line for IRA distributions, but you will enter zero (and “QCD” next to it) as taxable income if the full amount was a charitable distribution. This can help prevent your income from exceeding the thresholds for Net Investment Income Tax and from disqualifying you from other tax benefits.
These thresholds depend on your filing status, determined by factors such as whether you are married, a widow/widower, or supporting one or more children:
- Married filing jointly or qualifying widow: $250,000
- All other filing statuses: $200,000
- Married filing separately: $125,000
The Rules are Different for Roth IRA Accounts
Roth IRA accounts are subject to different rules for qualified charitable distributions compared to traditional IRAs. Qualified charitable distributions can be made from a Roth IRA, but generally there is no advantage to this since distributions from Roth IRA accounts are already tax-free. Contributions made to Roth accounts cannot be deducted, as you have already paid taxes on those funds you contributed.
Roth IRA accounts are also not subject to required minimum distributions (during the owner’s lifetime), so the more tax-efficient choice may be to use a traditional IRA account (if you have one) to fund the charitable distribution.
You Cannot Claim the Deduction Either
The main benefit of a qualified charitable distribution is that the distribution amount is not included in your Form 1040 as income, but there are some downsides here as well.
No
Qualified charitable distributions can also be used as a deductible charitable contribution if you itemize your deductions. This would be a sort of double tax benefit for the same transaction.
However, the qualified charitable distribution does not affect your ability to claim the standard deduction.
You will need more total standard deductions than itemized deductions for your filing status to make itemized deductions worthwhile.
Qualified charitable distributions can be beneficial for seniors who take the standard deduction instead of itemizing deductions since there is no tax benefit to donating to charities when claiming the standard deduction. In other words, you won’t lose anything when you make the charitable distribution.
For those who do not itemize deductions, donating to charities through a direct transfer from an IRA is the only way to gain a tangible tax benefit from this donation.
Frequently Asked Questions (FAQs)
Do I need to file any additional forms with my tax return if I make a qualified charitable distribution?
You typically report qualified charitable distributions on your Form 1040. There are two scenarios in which you will also need to file Form 8606 along with your Form 1040. The first is if the qualified charitable distribution was made from a Roth IRA, and the second is if the distribution was from a traditional IRA that has basis and you also received a distribution in the same year.
How can I ensure that the organization I am considering is eligible?
The charity to which you are making the qualified charitable distribution must be a qualified 501(c)(3) organization and eligible to receive tax-deductible contributions. You can use the IRS website to check if the organization is qualified. There may be organizations that you won’t find in the IRS search tool but are still eligible to receive contributions, such as some churches.
Source: https://www.thebalancemoney.com/qualified-charitable-distributions-3192883
Leave a Reply