Qualified Charitable Distributions

Individuals who own IRAs generally must begin to start receiving distributions from their IRAs by April 1 of the year following the year in which they reach age 70½ (if you were born before July 1, 1949; if you were born after June 30, 1949, age 72). These are known as Required Minimum Distributions (RMDs). Such distributions would be reported as taxable income on Form 1099-R, and may incur an income tax liability.

Individuals who make donations to charities may report such contributions as itemized deductions on Schedule A. To the extent that the individual has taxable income to be offset, the net result of the charitable contributions is a reduction of income tax liability.

However, individuals who take the standard deduction receive no tax benefit from making charitable contributions.

A qualified charitable distribution (QCD) is a nontaxable distribution made directly by the trustee of your IRA to an organization eligible to receive tax-deductible contributions. You must be at least age 70½ when the distribution was made. Also, the organization must provide you with the same type of written acknowledgment of your contribution necessary for you to claim a deduction for such charitable contributions. A QCD will count towards satisfying your RMD requirement for the year. Note that SEP or SIMPLE IRAs are not eligible for making QCDs, however.

The maximum annual exclusion for QCDs is $100,000. Any QCD in excess of the $100,000 exclusion limit is included in income, as any other distribution. If you file a joint return, your spouse can also make a QCD and exclude up to $100,000. The amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.

The ability to contribute directly to a charity from an IRA is a very important tax advantage for certain taxpayers. The provision allows IRA owners who are 70½ (if you were born before July 1, 1949; if you were born after June 30, 1949, age 72) to give directly to a charity and avoid reporting that income on their tax return. Thus, a QCD lowers Modified Adjusted Gross Income (MAGI). This could lower or eliminate the taxation of Social Security benefits. A QCD could also lower Medicare Part B and prescription drug premiums for those with higher income because MAGI is used to calculate such premiums.