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Top 10 Rules to Know About Qualified Charitable Distributions

| August 02, 2019
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If you are an IRA owner interested in donating to charity, a qualified
charitable distribution may be an option. These 10 rules outline how
a QCD should be done.


Arguably, one of the biggest changes to the tax code
in the Tax Cuts and Jobs Act of 2017 was the doubling
of the standard deduction. The Joint Committee
on Taxation estimates that nearly 90% of taxpayers
are likely to take the standard deduction instead of
itemizing. The decision not to itemize means that
charitable giving doesn’t seem like such a tax break.
But if you are over 70 1/2, qualified charitable
distributions (QCDs) can be a favorable way to make
donations to charities, because a distribution that
meets the requirements as a QCD is excluded from
gross income (so it’s nontaxable). Here are 10 features
and requirements that apply to QCDs.


1. QCDs have a dollar limit
You can make a QCD of up to $100,000 for a calendar
year. For married couples, each spouse is subject to a
separate $100,000 limit, leading to a total of $200,000
for a married couple.


2. December 31 deadline
A distribution must be processed by the end of the year
to be considered a QCD for that year. All distributions
processed between January 1 and December 31 of a
calendar year can be treated as QCDs for that year, as
long as they meet other requirements.


3. A 70½ age minimum
The account owner must be at least age 70½ on the
date the QCD is processed. According to the tax code,
you reach age 70½ six months after the date you turn
age 70. Distributions processed before then are not
eligible to be treated as QCDs.


4. They can only be made from IRAs
QCDs can only be made from IRAs, including inherited
IRAs. QCDs cannot be made from SEP and SIMPLE IRAs
that are ongoing—you receive an employer contribution
for the plan year within the tax year in which you make
the distribution.
If you want to use amounts held in an employersponsored retirement plan to make a QCD, you must
first roll over the amount from the plan to an IRA. Then
the QCD can be made from the IRA.
Of course, the amount must be eligible for rollover
to be considered a valid rollover to the IRA. Amounts
not eligible for rollover include required minimum
distributions (RMDs). Therefore, any RMD due from the
plan for the year must be distributed to you before the
rollover contribution is made from the plan to the IRA.


5. QCDs must be paid to the charity
A distribution made to you is not treated as a QCD.
Instead, the distribution must be made payable to the
charity. However, distributions made in the form of a
check payable to the charity can be delivered to you,
and you can then deliver the check to the charity.


6. The charity must be ‘eligible’
For this purpose, an eligible charity is one that meets
the definition under Internal Revenue Code (IRC)170(b)
(1)(A), other than an organization described in IRC
509(a)(3) or a donor-advised fund.


7. QCDs can be used to satisfy RMDs
A QCD can be used to satisfy an RMD if the RMD is
not distributed before the QCD is processed. But any
amount processed before the QCD is treated as an RMD
up to your RMD due for the year, and is therefore not
eligible for rollover.


Example 1: QCD is RMD


Jane’s RMD for the year is $10,000. In the first week
of December, Jane (age 74) submitted instructions to
her IRA custodian to process a QCD for $20,000 from
her IRA. At that time, Jane had not yet made any other
distributions from her IRA for the year.
Even though the $20,000 is paid to the charity and not
Jane, $10,000 of the $20,000 QCD is counted towards
Jane’s RMD for the year. As a result, Jane is not required
to distribute any additional amount for the year for
RMD purposes.
If Jane’s QCD was for $8,000, she would need to
distribute only $2,000 to satisfy her RMD ($8,000 QCD
+$2,000 regular distribution= $10,000 RMD).


Example 2: QCD is not RMD, and RMD is not eligible
for rollover


Tom’s RMD for the year is $10,000. During the first
week of December, Tom (age 75) instructed his IRA
custodian to process a QCD for $20,000. He had already
distributed $10,000 during the last week of November.
When Tom heard that a QCD can be used to satisfy
an RMD, he wanted to roll over the $10,000 that he
distributed in November. However, the amount was not
eligible for rollover because the first distribution made
during an RMD year goes toward satisfying the account
owner’s RMD until the RMD is satisfied, which means
that the $10,000 distributed in November is Tom’s RMD.
Had Tom taken that $10,000 distribution after the QCD
was processed, the amount would have been eligible
for rollover.


8. QCDs not subject to pro-rata rule
Generally, an IRA distribution includes a prorated
amount of pretax and after-tax funds, if your IRA
balance includes basis amounts. Basis amounts come
from nondeductible contributions and rollovers of
after-tax amounts from employer-sponsored retirement
plans.
For example, assume that you have one traditional
IRA with the balance of $100,000, and $20,000 of that
represents basis. If you take a distribution of $80,000
from the traditional IRA, the pro-rata rule would apply
as follows $64,000 of pretax assets would be taxable
and $16,000 of after-tax assets would be nontaxable,
leaving a balance of $20,000. The pretax amount would
be $16,000 and the basis would be $4,000.
One of the exceptions to this pro rata rule is a QCD.
Under this exception, a QCD is deemed to come first
from the taxable amount. Using the example above,
if the $80,000 distribution is a QCD, then that entire
amount would be attributed to the pretax balance,
albeit nontaxable because it is a QCD. As a result, the
remaining $20,000 would represent basis.
Note: All of your traditional, SEP, and SIMPLE IRAs are
aggregated and treated as one for this purpose.


9. Not subject to tax withholding
IRA distributions are subject to income tax withholding.
Under the withholding requirements, an IRA owner
can request to have 10% or more withheld for federal
income taxes plus any state tax. If you fail to make a
tax withholding election, the IRA custodian/trustee is
required to withhold 10% for federal income taxes.
One of the exceptions to this withholding rule is a
QCD. Therefore, whether or not the IRA owner makes
a withholding election, the IRA custodian must not
perform any tax withholding on a QCD.


10. QCDs are reported as regular
distributions
IRA custodians/trustees are required to report QCDs
as regular distributions. Despite the fact that a QCD
is nontaxable, the IRA custodian must report a QCD
as a taxable distribution on IRS Form 1099-R. Your
tax preparer is responsible for reporting the QCD as a
nontaxable distribution on your return 1040.
If you submit a distribution request that is intended to
be a QCD, you should notify your IRA custodian of your
intention. This will help the IRA custodian to ensure that
the amount satisfies the QCD requirement, including
that amount that is made payable to the charity.
However, it is your responsibility as the IRA owner to
ensure that the charity meets the requirement for being
an eligible charity under the QCD rules. In addition, you
must ensure that you meet the age 70½ requirement
before the QCD is processed.
If you are considering a QCD, you should consult with
a tax professional about whether or not it is the most
suitable option for making a donation. A CPA should
also be able to determine if it makes better tax sense to
donate other assets.

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