Qualified Charitable Distribution (QCD)

Qualified Charitable Contributions (QCDs) from an IRA are tax-free charitable donations made directly from an IRA by people ages 70½ and older and made possible by The Pension Protection Act of 2006.

By making a qualified charitable distribution (QCD) from an IRA directly to a qualified charitable organization, older IRA owners are allowed to exclude up to $100,000 annually from gross income. These gifts, also known as "charitable IRA rollovers," would otherwise be taxable IRA distributions. The law was originally scheduled to expire in 2007, but it was extended periodically before becoming permanent.

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QCDs are essentially the ideal mechanism to send a portion of your IRA to a desired charity tax-free.

When Willie Sutton, a famous bank robber, was asked “why do you rob banks?”

His reply became an instant classic, “because that is where the money is.” 

For both charities and donors, the money is in IRA accounts, and QCDs are a viable way to access funding with much less tax impact.

Before QCDs, you would request a distribution from the IRA and then make the contribution to the charity yourself. Then you had to include the distribution in your gross income and take a corresponding income tax deduction for the charitable contribution.

But, due to IRS limits, the additional tax from the distribution may end up being more than the charitable deduction. This made it more complicated and expensive to give to charities.

And because IRA’s have taxes tied to them forever, even after death, many generous people prefer to give to charities from this asset bucket. 

Here's how QCDs work:

You can instruct your IRA trustee to make a distribution directly from your IRA to a qualified charity. The distribution must be one that would otherwise be taxable to you, and you can exclude up to $100,000 of QCDs from your gross income each year.

And if you file a joint return, your spouse (if 70½ or older) can exclude an additional $100,000 of QCDs.

Note: You do not get a deduction and you do not get taxed. Reducing taxable income can help in other planning; i.e. medical limits, social security provisional income limits, veteran’s benefits and more by not increasing income.

Common Questions on QCDs

Do I have to give all of my QCDs to one charity?‍

No, you can give to many different charities.

A word of caution, though: make sure the charities are currently “Qualified” with the IRS, have filed a Form 990, and are up to date. You can ask them directly for proof, or also use sites like charitynavigator.org or charitywatch.org, foundation directories, or consumer reports to verify they are set up correctly.

Can I give to my grandchild's school or tuition?

Not exactly. You can give to the school if it's qualified, but you can't give to replace tuition for services received. Consider reaching out to your tax professional or an experienced advisor in charitable planning for specifics.

Tax specifics worth knowing: 

• QCDs count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to receive from your IRA, just as if you had received an actual distribution from the plan. However, distributions in cash from your IRA (including RMDs) that subsequently transfer to a charity cannot qualify as QCDs. And note that RMD age floor was 70 ½ until the SECURE ACT signed December 19, 2019 moved it to age 72.
• RMDs are calculated separately for each traditional IRA you own, but they can be taken from any of your IRAs.
• Definitely consider hiring a professional when you have non-deductible IRA’s or proportional IRA’s that will include some taxable and some non-taxable income. The IRS will treat first-of distributions as taxable in order to collect taxes sooner rather than later, and these nuances add up in a big way.
• QCDs provide an exclusion from income for the amount paid directly from your IRA to the charity — you don't report the IRA distribution in your gross income, and you don't take a deduction for the QCD. The exclusion from gross income for QCDs also provides a tax-effective way for taxpayers who don't itemize deductions to make charitable contributions.
• Also, your QCD cannot be made to a (PF) private foundation, (DAF) donor-advised fund, or supporting organization. And finally, the gift cannot be made in exchange for a charitable gift annuity or to a charitable remainder trust — both are split interest gifts with viable benefits in another context.
  

Assume that your RMD for 2022, which you're required to take no later than December 31, 2022, is $25,000. You receive a $3,000 cash distribution from your IRA in March 2022, which you then contribute to a charity. In August 2022, you also make a $22,000 QCD to a charity. You must include the $3,000 cash distribution in your 2022 gross income (but you may be entitled to a charitable deduction if you itemize your deductions).

Then, you can exclude the $22,000 of QCDs from your 2022 gross income.

Cool, right? Makes you wish you knew about this earlier.

And if you have multiple IRAs, they are aggregated when calculating the taxable and nontaxable portion of a distribution from any one IRA.

Some advice from a professional

There has been a mind set of growing IRA’s as big as possible for as long as possible, but this may not be in your best interest. Tax rates today may be less than tax rates in the future, and significant cash flow needs in the future (if mostly from IRA) will create taxes or reduced benefits even with careful planning.

Plus, one of the more common needs at the end of one’s life is custodial care and advanced medical care that you pay out of pocket, and the IRS rules on deductions for medical are limited to a portion above a 7% threshold.

The bottom line on qualified charitable distributions (QCDs)

The more income generated by IRA, the less deduction opportunities you have, and QCDs can help ease some of that tension.

And if giving to charities via QCD is good for someone while they are alive, is giving after you pass away via a beneficiary or bequest also smart for tax planning? Yes, the IRA will extend income taxes to your heirs and naming charities can be an effective planning tool as well.

In short, the IRA is a tax bomb, and Uncle Sam is going to take a lot more than you realize unless you are intentional and seek good counsel on how best to distribute and manage your IRA distributions.