How Qualified Charitable Distributions from Your IRA Can Reduce Taxes While Helping a Charity

As we approach year-end, you may be considering making a gift to your favorite charities, which may include the Milwaukee Tennis and Education Foundation.  If you’re 70 ½ or older, you have the option of making that gift from your IRA.

The qualified charitable distribution, or QCD, is available to IRA owners that are 70 ½ or older at the time of the donation.  There are several items to consider if you wish to donate to MTEF using a QCD:

 ·        Up to $100,000 per IRA owner can be distributed directly from an IRA to charity per year

o   The distribution counts towards the IRA owner’s Required Minimum Distribution (RMD) for the year.

o   For a married couple, each spouse has their own $100,000 limit.

·        To be considered a QCD, the following conditions must be met:

o   The IRA account holder must be age 70½ or older as of the date of the distribution.

o   The distribution must be made to a public charity.

§  Donor-advised funds, private foundations, and supporting organizations do not qualify.

o   The payment would have to otherwise qualify as a charitable contribution.

o   The distribution must be a direct transfer from the IRA trustee to the charity.

§  It cannot be a reimbursement to the IRA owner for gifts made from other funds.

·        The taxpayer neither reports the income as part of AGI nor claims a charitable deduction.  Because of this, the taxpayer will realize the maximum tax benefit available to them without having to worry about claiming the charitable deduction by itemizing.

o   Because a QCD doesn’t count as income, it will not impact the taxation of Social Security and won’t increase income for Medicare purposes, among other tax benefits.

·        QCDs are not automatically reported by the IRA custodian.

o   1099-Rs do not include information on QCDs.  It’s important to notify your tax preparer that you did a QCD to ensure you receive the tax benefit.  Otherwise, they will have no way of knowing you did one.

o   To report a QCD on your Form 1040 tax return, generally report the full amount of your IRA distributions on Line 4a.  On line 4b, enter only the taxable amount (line 4a less QCDs and any other non-taxable amounts) and enter “QCD” next to this line. 

If you make your QCDs by writing checks from your IRA, the check must be cashed by December 31 in order for the distribution to count for that year.  This is especially important if the QCD will be used to satisfy your required minimum distribution.  You may want to contact MTEF or other charity to notify them that a check is coming and it needs to be cashed prior to year-end. 

QCDs are just one way to make a donation to charity.  There are numerous other techniques available to you that could also provide tax benefits.  Consult with your tax advisor for additional ways to maximize tax benefits when making donations to charity.

This information was put together for the MTEF community by MTEF Vice President, Brian Ellenbecker, CFP®, EA, CPWA®, CIMA®, CLTC® at Shakespeare Wealth Management, LLC