Qualified Charitable Distributions and Gift Giving

The last few years have been a challenging time for all of us – and that includes businesses. Because of their reliance on charitable donations, nonprofit organizations have been adversely affected as well. Due to the pandemic and the resulting economic uncertainties, public charities are reporting a decrease in charitable giving – which, in turn, affects their revenue and their ability to support the communities they serve.

If you have a cause you are passionate about, now is an optimal time to pinpoint a charity you would like to support this holiday season. IRA owners age 70½ or older have the option of making a qualified charitable distribution (QCD) to make this happen. A QCD is a direct transfer from a traditional or inherited IRA made payable to a qualified charity. Transfers from inactive Simplified Employee Pension Plan (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRA plans apply as well. Making a QCD to support a deserving cause during this time could have an enormous impact, and it may provide a tax benefit to you.

How Qualified Charitable Distributions Work

QCDs must be paid directly from an IRA to your charity of choice, which means you cannot receive a distribution directly from your IRA to then donate to a charity. In addition, you cannot receive any benefit in return for your charitable donation.

Your designated charity must be qualified to receive QCDs. Charities such as donor-advised funds, private foundations, and nonprofits that support these types of organizations are ineligible.

IRA owners can directly transfer up to $100,000 annually ($200,000 for joint tax filers) from an IRA to a charity without taxation. This limit applies to donations made to one or more charities in a calendar year. QCDs cannot be made from an IRA prior to the owner reaching the age of 70½.

Requesting a Qualified Charitable Distribution

Requesting a QCD is relatively simple, but be sure to adhere to the following guidelines:

• In order for the distribution to count toward your required minimum distribution (RMD) for the year, the funds must be transferred directly from your IRA to the qualified charity by December 31 of that year.
• The IRA custodian must issue the check made payable to the public charity. The best practice would be to request that the check be mailed directly to the charity, and then track its arrival so you know when it has been received. If you are concerned about mailbox theft, another option is to request that the check be made payable to the charity but mailed to your personal address so you can deliver it to the appropriate individual.
• Follow up with the charity to request a receipt to document the QCD for your personal files and tax records.

Tax Implications Resulting from Qualified Charitable Distributions

Unlike a regular IRA withdrawal, a QCD excludes the withdrawn and donated amount from taxable income. You will receive a Form 1099-R from your IRA custodian, and the QCD should be reported as a Normal Distribution for the calendar year the distribution is made. You would then report the QCD on your Form 1040 accordingly.

It’s important to note that a distribution from your IRA will not qualify as a QCD – and will therefore be treated as taxable income if:

• The distribution check is made payable to you rather than the charity.
• You request a QCD prior to reaching age 70½.

Our daily lives have been upended, and we should expect holiday celebrations and gift giving to be different, too. If you’re eligible to make a QCD, it could be a game changer for a deserving cause. And you could reap the potential tax benefits while making a positive change in the world. To learn more about whether a QCD is right for you, contact your First Command Financial Advisor today.

For more information about estate planning, read Estate Planning 101, Six Estate Planning Questions to Always Ask Your Attorney,  Digital Assets for your Estate Plan and Planning Your Estate with Minors and Young Adults.