November 17, 2022
The Internal Revenue Service today reminded IRA owners age 70½ or over of their option to transfer up to $100,000 to charity tax-free each year.
These transfers, known as qualified charitable distributions or QCDs, offer eligible older Americans a great way to easily given to charity before the end of the year. Moreover, for those who are at least 72, QCDs count toward the IRA owner's required minimum distribution (RMD) for the year.
How to to set up a QCD
Any IRA owner who wishes to make a QCD for 2023 should contact their IRA trustee so the trustee will have time to complete the transaction before the end of the year.
Normally, distributions from a traditional individual retirement arrangement (IRA) are taxable when received. With a QCD, however, these distributions become tax-free as long as they're paid directly from the IRA to an eligible charitable organization (as described in IRC Section 509(a)(3)).
QCDs can be made electronically, directly to the charity, or by check payable to the charity.
An IRA distribution, such as an electronic payment made directly to the IRA owner, does not count as a QCD. Likewise, a check made payable to the IRA owner is not a QCD.
Each year, an IRA owner age 70½ or over can exclude from gross income up to $100,000 of these QCDs. For a married couple, if both spouses are age 70½ or over and both have IRAs, each spouse can exclude up to $100,000 for a total of up to $200,000 per year.
The QCD option is available regardless of whether an eligible IRA owner itemizes deductions on Schedule A. Transferred amounts are not taxable, and no deduction is available for the transfer.
Why are QCDs important?
Without this special rule, taking a distribution from your IRA and donating the proceeds to a charity would be a bit more cumbersome, and possibly more expensive. You would need to request a distribution from the IRA, and then make the contribution to the charity. You'd receive a corresponding income tax deduction for the charitable contribution. But the additional tax from the distribution may be more than the charitable deduction, due to the limits that apply to charitable contributions under Internal Revenue Code Section 170. QCDs avoid all this, by providing an exclusion from income for the amount paid directly from your IRA to the charity--you don't report the IRA distribution in your gross income, and you don't take a deduction for the QCD. The exclusion from gross income for QCDs also provides a tax-effective way for taxpayers who don't itemize deductions to make charitable contributions.
