A Qualified Charitable Distribution (QCD) or charitable IRA rollover is a gift option that enables donors age 70½ or older to transfer up to $100,000 directly from the donor’s IRA to a qualified charitable organization each year. The donor does not recognize the distribution amount as taxable income on his or her tax return and can also use the QCD to help satisfy their Required Minimum Distribution (RMD).
Normally, when you take a distribution from your IRA, the distributed amount adds to your taxable income and increases your adjusted gross income (AGI) for the tax year. However, since a QCD is not considered taxable income, it does not increase your AGI and may keep you in a lower tax bracket. By keeping your AGI relatively low, you may be able to keep other income from being subject to the net investment income tax, avoid Medicare premium surcharges, and stay below certain deduction and credit phase-out limits which are based on your AGI.
While a higher standard deduction under the Tax Cuts and Jobs Act will result in fewer people itemizing and make it more difficult to obtain a financial benefit for charitable donations, the QCD enables filers claiming the standard deduction to get the benefit of the charitable donation by virtue of excluding the QCD from income altogether.
In addition, QCDs can be particularly beneficial to families whose IRA Required Minimum Distribution (RMD) would push them into a higher federal capital gains bracket. For example, if a taxpayer can avoid being pushed to the 15% long-term capital gains bracket, they can benefit from remaining in the lower bracket where long-term capital gains receive 0% tax treatment at the federal level.
Please be aware of the following IRS requirements and consult your tax accountant before making any charitable distributions from your IRA. The QCD is available only for charitable gifts from a traditional IRA and not from any other type of retirement plan. Some charities, such as private foundations, supporting organizations, and donor-advised funds, do not qualify. The distribution is allowed only for outright gifts to a qualified public charity for which the donor receives no benefits. The gift should be transferred from your IRA directly to the charity, and any distribution must be completed by December 31st in the tax year to qualify. A married couple with separate IRAs can donate up to $100,000 each from their respective IRAs. In addition, some states treat the QCD as a withdrawal for state tax purposes, but this varies from state to state. Please be sure to consult your tax accountant to understand the tax impact at your state level and to determine if a QCD may be appropriate for you.