You have until December 31 to do a qualified charitable distribution (QCD) for 2018.
This is an effective tax strategy that many individuals are overlooking. A QCD is worth considering if you are donating to charitable organizations and taking required minimum distributions (RMDs) this year. With the increase in the Standard Deduction, many people (specifically Retirees) won’t be itemizing. If you plan to give to charity and you’re over 70 & ½ , using a QCD can be an efficient way to accomplish your charitable giving goals while being tax efficient.
If you are an owner or beneficiary of an IRA and you are at least 70 ½ years old, you can make a QCD, unless you intend to distribute funds from a Roth IRA. Read on to learn about the advantages and stipulations of QCDs.
Tax Break on Giving Back
Thanks to tax reforms, QCDs are more beneficial than ever for the 2018 tax year. If you take the standard deduction, you would be eliminating your tax deduction for gifts to charity since you would not be itemizing deductions. You can get a tax break for this year’s charitable contributions with a QCD.
You can add a QCD to the standard deductions. It lowers your AGI by allowing you to deduct charitable donations disbursed from your IRA from your income.
The annual limit is $100,000 per individual. Married couples can both quality, each contributing a QCD of $100,000 each year. However, you will not be able to take a tax deduction for the charitable gift.
How to Make a QCD
You must make your QCD as a direct transfer from the IRA to the nonprofit of your choice. You could also have the IRA issue a check made payable to the your preferred organization. If you receive a distribution, you are not allowed to forward those funds to your charity.
You can make a QCD from IRA, Roth IRA, SIMPLE IRA, or inactive SEP. However, you are not allowed to do a QCD from any employer plan. QCDs can only apply to taxable amounts in your retirement account. Because of this exception to the pro-rata rule that typically applies to traditional IRA distributions, Roth IRA QCDs are not common.
What about RMDs?
The amount you transfer from your IRA to your nonprofit as a QCD will count toward your RMD for 2018. Your QCD may help you meet all or a portion of your RMD. For instance, if your 2018 RMD is $20,000, you can withdraw $10,000 and do a $10,000 QCD.
How to Report on Tax Return
To report a QCD on your tax return, report the total amount of the donation on the line for IRA distributions. Enter “zero” on the line for the taxable amount if the entire amount was a QCD, and enter “QCD” next to the line. You can find more information in the Form 1040 instructions.
You will be required to file Form 8606, Nondeductible IRAs if:
- The QCD is disbursed from a Roth IRA; or
- You make the QCD from a traditional IRA in which you have basis and receive an IRA distribution during 2018.
Words of Caution
You must not receive any remuneration of any kind — financial, gift, or otherwise –for the donation. QCDs do not include gifts to private foundations or donor advised funds.
If you plan to do a QCD for this year, inform your tax preparer. The 2018 Form 1099-R that you will receive from the IRA custodian will not likely have any information regarding a QCD if the donation is made close to the end of the year. Make them aware of the the disbursement to prevent any oversight.
Failing to take your RMD exposes you to penalties of up to half of the amount you were supposed to have taken. QCDs allow you to donate to your favorite causes tax-free, help you meet your RMD, and avoid the stiff and unnecessary cost of not using your money. You still have time to tap into this tremendous opportunity.