For nearly a decade, the rules allowing for a tax-free Qualified Charitable Distribution (QCD) directly from an IRA to a charity have been on-again, off-again. However, the Protecting Americans from Tax Hikes (PATH) Act of 2015 made the QCD rules permanent, making it easier to engage in proactive charitable-giving strategies that help to minimize the tax bite of an IRA’s Required Minimum Distribution (RMD) obligations.
Obtaining the tax benefits for doing a QCD from an IRA to a charity requires meeting specific requirements, including:
- The IRA owner must be at least age 70 ½ or older on the date of distribution.
- The maximum dollar amount of a QCD is limited to $100,000 per year. This annual limitation is done on a “per-taxpayer” basis; a married couple can each do up to $100,000 as long as each taxpayer’s QCDs come from his/her respective IRA.
- Only distributions from an individual IRA (including a rollover IRA) are eligible, and not from a SEP or SIMPLE IRA, nor from any type of employer retirement plan.
- The distribution must go to a public charity, and thus cannot go to a private foundation, a charitable supporting organization, or a donor-advised fund.
- The charitable distribution from the IRA must be one that otherwise would have been eligible for a full charitable deduction, which ensures that the IRA donor does not receive any kickbacks or other “quid pro quo” benefits for the donation. This requirement also prevents any “split-interest charitable trust” (e.g., a charitable remainder trust or a charitable lead trust) from being an eligible QCD beneficiary.
The benefit of doing a QCD from an IRA is that the distribution comes out of the IRA without any of the tax consequences that would otherwise apply to a withdrawal. Notably, there is no charitable deduction for making the QCD contribution to the charity, but only because by definition it was already entirely pre-tax (having come directly from a pre-tax IRA).
In addition, to the extent that the IRA owner had a Required Minimum Distribution (RMD) obligation for the year, the QCD is deemed to satisfy the RMD, even though the QCD is not taxable as an RMD otherwise would have been.
To complete a QCD from an IRA to a charity, the IRA owner must:
- Submit a distribution form to the IRA custodian, requesting that the check be made payable directly to the charity.
- Ensure that no tax withholding is being done from the QCD to the charity (as the money must actually go to the charity to qualify, and as a non-taxable distribution no withholding should be necessary).
- Send the check directly to the charity, or to the IRA owner to be forwarded along to the charity.
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