Wednesday, July 3, 2019

Maximizing and Working with Qualified Charitable Distributions from an IRA

Enacted in 2006 and made permanent as of 2014, Congress provided a vehicle for owners of individual retirement accounts (IRAs) to make charitable contributions without creating adverse tax consequences through a qualified charitable distribution (QCD).  With the increase in the standard deduction in 2018 and fewer individuals claiming itemized deductions, more charities are receiving contributions from IRAs. 

Qualified Charitable Distribution (QCD)

A QCD is a distribution(s):

  • coming from any type of IRA, including a Roth IRA, but does not include an IRA utilized in a SEP IRA or a SIMPLE IRA while the participant is still an active participant in the plan;
  • made directly by the IRA trustee to a Code Section 170(b)(1)(A) charitable organization.  This would include most organizations exempt under IRC Section 501(c)(3) organizations with the exception of an organization classified as a supporting organization under 509(a)(3).  There is also a prohibition against contributing the funds to a donor advised fund;
  • that is entirely deductible as a charitable contribution under Code Sec. 170 other than any potential percentage limit imposed by Code Sec. 170(b).  There cannot be a benefit given in exchange for the contribution creating a quid pro quo contribution;
  • documented with a contribution receipt meeting the substantiation requirements of Code Sec. 170(f)(8) (among other requirements, this means the contribution receipt contains the required "no goods or services" statement);
  • made after the IRA owner turns 70 1/2; and 
  • not exceeding $100,000 per year for the IRA owner. 

Benefits to the IRA owner:

  • The amount of the QCD is not included in the taxable income of the IRA owner and the owner is not entitled to a charitable contribution for the QCD.  Since not all taxpayers benefit from charitable contributions, an adverse tax consequence may be created if the owner of an IRA receives an IRA distribution and subsequently makes a contribution of an equal amount to a qualifying charity.  The QCD avoids this consequence since it moves the funds directly to the charity without moving through the separate accounts of the IRA owner.  
  • IRA owners are required to receive minimum distributions (RMD) from their IRAs after they are 70 1/2.  Many taxpayers may not desire to receive the minimum distribution and may not have need of the funds.  The amount of a QCD may be applied to the RMD and assist in avoiding taxes on the RMD.  Therefore, older taxpayers may be able to meet their own personal giving goals and minimize unwanted tax consequences of a RMD. 
  • A QCD may also be made from an inherited IRA as long as the beneficiary has attained age 70 1/2.

Responsibilities of the Recipient Charity

While most of the rules associated with these distribution/contributions fall to the IRA owner, recipient charities must assist the donor/IRA owner in complying with two important aspects of the QCD.  

The recipient charity should confirm it is a qualifying charity and it must issue a qualifying charitable receipt according to the requirements of Code Sec. 170(f).  Due to the unique tax  structure surrounding these transactions, charities should not add these donations to donor records and allow the gifts to be reported on a donor's regular contribution receipt issued at the end of the year.  These contributions must be receipted separately from a donor's other contributions to a charity.  

The following is a sample of the donor letter that may be used to receipt a QCD: 

Dear  [Name of Donor]

Thank you for your charitable gift of $_____________  to [name of church or charity] from your individual retirement account (IRA).  We  received your gift on ________________ directly from  [Name of IRA Administrator/Trustee]  This acknowledges that we have received your gift from your IRA and that it is your intention for all or a portion of the gift to qualify as a qualified charitable distribution (QCD) from your IRA under Internal Revenue Code (IRC) Section 408(d)(8).

This letter confirms the receipt of the donation and that [name of church or charity] is a qualified public charity under IRC Section 170(b)(1)(A) and that your donation has not been transferred to either a donor advised fund or a supporting organization defined in IRC Section 509(a)(3).  We further confirm that no goods or services have been provided in exchange for the donation. (Churches should also include "other than intangible religious benefits" in the statement). 

While your gift may be applied to any pledge or commitment you have made to [Name of church or charity], the QCD is not a tax deductible charitable gift.  The gift will not be included on any other charitable contribution receipt issued (or if included on any receipt, it will be listed as a nondeductible donation.)  A QCD may count towards your annual IRA required minimum distribution (RMD) and not deemed taxable income.  Please consult with your tax adviser regarding these unique rules. 

Thank you for your generous support of [name of church or charity].

There is not a penalty to a recipient charity for failing to assist the donor/IRA owner with an appropriate receipt.  However,  failure to issue the receipt results in the distribution failing to qualify as a QCD and creates a taxable distribution to the donor/IRA owner.  

Qualified charitable distributions create a wonderful avenue for donors to support their favorite charities, manage their required minimum distributions from their IRAs and minimize the tax consequences associated with these funds.