Qualified Charitable Distribution
/A valuable opportunity for those over 70½ years of age is the Qualified Charitable Distribution (QCD) where those required to take minimum distributions may make direct contributions from their traditional IRA up to $100,000. When a direct transfer occurs, the donation is excluded from the Adjusted Gross Income, replacing the donation as an itemized deduction.
As noted above, QCDs are allowed to be made from traditional IRAs, as well as inactive SEP and SIMPLE plans, and inherited IRAs. However, they are not allowed to be made from 401(k) or other employer plans.
To maintain the validity of a QCD, be aware of some exceptions that can nullify its benefit. Donations to donor advised funds (DAF) are not allowed the benefit of a QCD. Nor are donations to private foundations.
Quid pro quo, or any benefit in excess of 15% received by the donor, is not allowed to be considered a QCD. This includes state Scholarship Granting Organization Credits and Neighborhood Assistance Tax Credits, that normally allow a higher percentage for the state credit. Although the IRS will not allow the QCD, most states will allow the credit as per their original guidelines.
Finally, the IRS has specific guidelines for all charitable donations, whether QCD or as an itemized deduction. One such guideline is to verify it is a qualified charity. This may
be done at the IRS website. Also, for a donation to qualify, a contemporaneous written letter for donations of $250 or more is required from the qualified charity.
To assist your tax preparer with accurate reporting, when making a QCD, provide the tax preparer with the date, amount, IRA account, and charity information. You may know it is a QCD, however the end-of-year tax reporting document (Form 1099-R) will report it as a normal taxable distribution. Another way to assist your preparer would be to separate and note on the receipt or letter all charitable donations such as QCD donations or itemized deduction donations.
- Pam Smitson, CPA, CGMA, Smitson Erhart-Graves Financial Advisors
