Qualified Charitable Distributions: Why Your IRA Clients Might Be Requesting QCDs
By Kristiana Rodriguez
As the end of the year approaches, some of your clients may start requesting qualified charitable distributions (QCDs). By donating funds directly to a charitable organization, eligible IRA owners or beneficiaries can satisfy their annual required minimum distribution (RMD)—if they have one—and exclude the distribution from their taxable income, as determined by, and reported on, IRS Form 1040, U.S. Individual Income Tax Return.
Individuals may take QCDs from Traditional and Roth IRAs, and from a simplified employee pension (SEP) plan or a savings incentive match for employees of small employers (SIMPLE) IRA if the plan is not “ongoing.” According to IRS Notice 2007-7, a plan is considered ongoing if an employer contribution is made for the plan year ending with or within the individual’s taxable year for which the QCD tax treatment is sought.
Annual Dollar Amount
QCDs are limited to $105,000 for 2024 (indexed for cost-of-living adjustments). For married couples filing a joint income tax return, the limit applies separately to each spouse.
The QCD amount is limited to the amount of the distribution that would otherwise be included in income. Because qualified Roth IRA distributions are distributed tax free, a QCD taken from a Roth IRA will have no beneficial tax effect unless there are earnings being distributed in a nonqualified distribution. If there have been Traditional IRA nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.
Individuals may donate a one-time QCD of up to $53,000 (indexed) to a “split interest entity” (charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts). This $53,000 limit is within the overall $105,000 annual limit (as indexed) for 2024 and is subject to certain restrictions. The remainder of the annual limit could be contributed as a QCD to a qualified charitable organization in the normal manner.
Age Limit
IRA owners and beneficiaries must be age 70½ or older to make a QCD. Although the applicable RMD age is currently 73, the minimum age requirement for QCD remains unchanged.
Financial Organizations’ Responsibilities
Financial organizations must pay QCDs directly to the receiving charity. For example, if a check is issued for the QCD amount, the financial organization must make the check payable to the charity (not to the client). Clients can, however, personally deliver a QCD check to the receiving charity.
Financial organizations must report the QCD in the client’s name and Social Security number on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,.
For Traditional IRAs, financial organizations should enter the QCD amount in both Box 1, Gross distribution, and Box 2a, Taxable amount. Financial organizations should also check Box 2b, Taxable amount not determined, and enter Code 7, Normal distribution, or code 4, Death, in Box 7, Distribution code(s).
For Roth IRAs, financial organizations should enter the QCD amount in Box 1, leave Box 2a blank, and check Box 2b. Financial organizations should enter code Q, Qualified distribution from a Roth IRA, or code T, Roth IRA distribution, exception applies, in Box 7.
NOTE: QCDs are not subject to federal withholding requirements because a request to the payor for a QCD is deemed to be an election to waive otherwise-applicable federal withholding. State withholding rules may apply, however.
Clients’ Responsibilities
Clients are responsible for knowing whether the recipient organization is an eligible charitable organization that meets the following conditions.
The charitable organization must be a tax-exempt 501(c)(3) organization to which a taxpayer could make donations and claim a charitable deduction on IRS Form 1040.
Among private foundations, only those described in Internal Revenue Code Section 170(b)(1)(F) qualify.
The recipient cannot be a donor-advised fund, contributions to which generally permit the donor to retain some control over their use.
Clients are also responsible for excluding the QCD amount from their taxable income on IRS Form 1040. The QCD amount is reduced for IRA owners age 70½ and older who make deductible Traditional IRA contributions. IRA owners should refer to Appendix D in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), for more information on how to calculate their eligible QCD amount.
