Considering a QCD? Start Here

What is a Qualified Charitable Distribution (QCD)?

In the simplest terms, a Qualified Charitable Distribution, or QCD, is a distribution from a retirement account that is given directly to a charity. Some conditions apply; for example, only certain charities qualify for QCDs. Additionally, QCDs are nontaxable only when all of the qualifications are met (whereas distributions from retirement accounts, such as IRAs, would generally be taxable in the year received). Finally, as a QCD is nontaxable when said qualifications are met, you cannot claim a charitable contribution deduction for the payment.

Generally, a Qualified Charitable Distribution is made by the trustee of an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual aged 70 ½ or over directly to a charitable organization eligible to receive tax-deductible contributions.

QCDs are a popular way to do some good while also reaping some benefits for your tax planning strategy.

What is the benefit of a Qualified Charitable Distribution (QCD)?

One significant benefit of taking a QCD is that it can satisfy all or part of your required minimum distribution or the minimum amount you must withdraw from your IRA each year.

You cannot keep retirement funds in your account indefinitely, and generally, you have to start taking withdrawals when you reach age 70 ½. (However, it is worth noting that changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019 now allow those whose 70th birthday is July 1st, 2019, or later to delay taking withdrawals until age 72. Additionally, Roth IRAs do not require withdrawals until after the owner’s death.

Nevertheless, in many cases, you will have to take your RMD each year. While you can withdraw more than the minimum required amount, generally, you cannot withdraw less, and your withdrawals are included in your taxable income — unless part of your RMD is tax-free, such as in the case of QCDs.

For example, if your 2021 RMD was $10,000, and you made a $5,000 Qualified Charitable Distribution for 2021, you only have to withdraw another $5,000 to satisfy your minimum for the year. Doing this will lower your taxable income versus if you had taken the fully taxable $10,000 distribution without using a QCD.

What Are the Rules for a QCD?

As mentioned before, QCDs can only be used for organizations eligible to receive tax-deductible contributions. Additionally, you must be at least age 70 ½ when you make the distribution.

Some other rules governing Qualified Charitable Distributions include:

• You must have the same type of acknowledgment of your contribution that you would need to claim a deduction for a charitable contribution. (See Substantiation Requirements in Publication 526.)
• The maximum annual exclusion for QCDs is $100,000 per taxpayer. Any QCD over the $100,000 exclusion limit is included as income of any other distribution. If you file a joint return, your spouse can also have a QCD and exclude up to $100,000.
• The amount of the QCD is limited to the distribution that would otherwise be included as income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.

There are also specific qualifications that you must meet to take a QCD. For example:

• You must be at least age 70½ when the distribution is made.
• The amount of the QCD is reduced by the aggregate IRA contribution deductions made by you after you turn 70½.
• A charitable contribution deduction on Schedule A (Form 1040), Itemized Deductions, cannot be claimed for any QCD excluded from income.
• The QCD cannot be distributed to you first and then donated. You must transfer it directly to the charity. Any check issued must be made payable to the charity. If you have check-writing privileges for an IRA, you may be able to write out a check to the charity. Check with your IRA trustee for the proper QCD procedure.

Lastly, it is also worth noting that you are permitted to spread your QCD across multiple operating charitable organizations, provided they qualify (donor-advised funds, for example, do not qualify).

Can You Do a Qualified Charitable Distribution From a 401(k)?

In short, no — the QCD is only available as a tax-free transfer from an IRA. However, workarounds can still allow you to make tax-free donations from a 401(k). For example, you can roll your 401(k) funds into a traditional IRA and then take QCD from there. Alternately, as part of your estate planning, you can name a public charitable organization, like a donor-advised fund, as a beneficiary to be paid upon your death (although that’s a bit too late for you to enjoy the tax benefits personally!).

How Do You Claim QCD on Your Taxes?

To report a qualified charitable distribution on your tax returns, you generally must report the total amount of the charitable distribution using Form 1040 on the line for IRA distributions.

On the line for the taxable amount, enter zero if the full amount was a qualified charitable distribution — however, to avoid making an error, ensure that the total amount of your contribution was actually nontaxable as a QCD! Then, enter “QCD” next to this line.

For additional information, see the Form 1040 instructions.

You must also file Form 8066, Nondeductible IRAs, if either of the following applies:

• You made the qualified charitable distribution from a traditional IRA in which you had basis and received a distribution from the IRA during the same year, other than the qualified charitable distribution.
• The qualified charitable distribution was made from a Roth IRA.

How is a QCD Reported on a 1099?

Charitable distributions are reported on Form 1099-R for the calendar year the distribution is made.

In Closing

As a way to do some good through charitable donations while also reducing your required minimum distribution and tax burden, Qualified Charitable Distributions are an attractive option — as long as you understand and take care in executing the process.

Additionally, as in any tax strategy, looking ahead is vital. Planning your QCD at the beginning, not the end, of the year is one of the best ways to maximize your benefit.