With the tax reform changes that became effective in 2018, fewer taxpayers will be itemizing deductions on their federal income tax returns – which means fewer taxpayers will be taking a tax deduction for their charitable donations. Even if a taxpayer no longer itemizes their tax deductions, a self-directed IRA owner age 70½ or older who makes a “Qualified Charitable Distribution” (QCD) will not pay any tax on the money they take out of their IRA and give to a qualified charity. This includes the otherwise taxable “required minimum distributions” (RMDs) IRA owners are required to take each year after reaching age 70½.
To make a nontaxable charitable donation from an IRA, the money must be transferred directly from the IRA to an organization eligible to receive tax-deductible contributions. A qualified charitable organization generally includes
• Organizations operated for charitable, religious, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals (e.g., churches, 501(c)(3) organizations, nonprofit colleges, museums, hospitals and research organizations)
• Veterans’ organizations
• Fraternal societies and associations
• Governmental or political subdivisions of a state (e.g., city police department)
You can find out if a charitable organization qualifies by using the IRS’s online tool, Tax Exempt Organization Search: https://apps.irs.gov/app/eos/
Because a QCD must be transferred directly from the IRA to a qualified charitable organization, it’s important to inform your IRA custodian that a withdrawal or RMD is intended to be a QCD before the money leaves your IRA. You cannot withdraw money from an IRA and later decide to use it for a QCD. All QCDs for 2018 must be made by December 31, 2018.
The maximum amount that may be excluded from taxation each year as a QCD is $100,000. If an IRA owner files a joint return, the spouse can also exclude a QCD up to $100,000, for a family total of up to $200,000. A QCD must be made from assets that would otherwise be taxable in the year withdrawn from the IRA. If a traditional IRA includes nondeductible contributions (or rollovers of after-tax dollars from an employer plan), a QCD will be first considered to be paid out of the IRA’s otherwise taxable income (deductible IRA contributions, rollovers of pre-tax dollars from employer plans). This increases the proportionate amount of basis left in the IRA so future distributions may include more nontaxable dollars. The tax rules prohibit QCDs from an ongoing SEP or SIMPLE IRA that continues to receive contributions under the employer’s SEP or SIMPLE IRA plan.
To learn more about how you can make a QCD, contact your IRA custodian and the charitable organization of your choice to obtain all the necessary information to complete a donation. Be sure to follow the proper procedures for the QCD so that your donation is tax-free, and keep documentation of the transfer (e.g., letter of authorization from the charity) for your tax files.
If you have questions about QCDs, you may also contact us at 866-928-9394 or Service@StrataTrust.com.