A Qualified Charitable Distribution (QCD) is a direct transfer from your retirement account to a qualified charity. The benefit is that the distribution is not added to your taxable income. Since you have to be 70 ½ to make a QCD, it’s most often used by retirees that wish to donate their Required Minimum Distribution (RMD) – either whole or partial - to a qualified charity. You can donate more than your RMD as a QCD, but only up to $100,000 will count toward the QCD.
The QCD satisfies the RMD by reporting the full amount of the charitable distribution on your tax return on the line for the IRA distribution and then entering $0 for the taxable amount. By not having to pay income tax on the RMD, your Modified Adjusted Gross Income is lower. A lower MAGI is beneficial because:
Your monthly Medicare premium is based on your MAGI
Deductible passive real estate losses are based on your MAGI
Medical expense deductions are based on your MAGI
As long as you’re 70 ½ you can make a QCD from Traditional, Rollover, and Inherited IRAs, as well as inactive SEP and SIMPLE plans held for two years or more. QCDs are allowed, but are not tax opportunities for Roth IRAs, as these distributions are not subject to RMDs during the taxpayer’s lifetime.
To be considered a qualified charity, the charity must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions. A QCD must be completed by the RMD deadline (usually December 31).
RMDs issued to the taxpayer, then donated, do not qualify as a QCD since it was not a direct transfer to the charity. Checks written from an IRA account made payable to the qualified charity do qualify as a QCD. It is best to check with your investment manager and your tax preparer to be sure you are following the appropriate guidelines before making the donation.
The 1099-R issued will not distinguish that you made a QCD, leaving no reason for the tax preparer to exclude the income. Therefore, when you file your income tax return, it is important that you provide your tax preparer with the QCD information, including the written acknowledgement from the charitable organization.