Reminder: Tax-Free Charitable Transfer Option for IRA Owners
The IRS recently issued a reminder for individuals aged 70½ or older who own individual retirement arrangements (IRAs), stating they have the opportunity to make tax-free transfers of up to $100,000 to charitable organizations each year.
These transfers, known as qualified charitable distributions (QCDs), provide a convenient way for eligible older Americans to contribute to charity before year-end. For those aged at least 73, QCDs also fulfill the IRA owner's required minimum distribution (RMD) for the year.
How to Make a QCD
To initiate a QCD for 2023, IRA owners should promptly contact their IRA trustee. This allows sufficient time for the trustee to process the transaction before the year concludes.
Unlike regular taxable distributions from traditional IRAs, QCDs are tax-free, but only if they’re directly paid from the IRA to an eligible charitable organization. Distributions made to the IRA owner or checks payable to the IRA owner do not qualify as QCDs.
Annually, IRA owners aged 70½ or older when the distribution occurs can exclude up to $100,000 of QCDs from gross income. For married couples with both spouses aged 70½ or older and holding IRAs when the distribution occurs, each spouse can exclude up to $100,000, allowing a combined total of up to $200,000 per year.
The availability of the QCD option is not dependent on whether an eligible IRA owner itemizes deductions on Schedule A. The transferred amounts are not subject to taxation, and no deduction is applicable for the transfer.
Accurate Reporting is Crucial
Reporting procedures for a 2023 QCD involve inclusion on the 2023 federal income tax return, typically filed during the 2024 tax filing season. In early 2024, IRA owners will receive Form 1099-R from their IRA trustee, detailing all IRA distributions made in the 2023 calendar year, including both regular distributions and QCDs. The total distribution is shown in Box 1 of the form and there is not a distinct code for QCDs.
Similar to other IRA distributions, QCDs are reported on Line 4 of Form 1040 or Form 1040-SR. If part or all of an IRA distribution is a QCD, the total should be entered on Line 4a (the same amount shown in Box 1 on Form 1099-R). If the entire distribution is a QCD, Line 4b should reflect 0. If only a portion is a QCD, the remaining taxable amount is recorded on Line 4b. Regardless, be sure to notate “QCD” next to Line 4b.
Don’t Forget Your Receipt
It is important to note that QCDs are not deductible as charitable contributions on Schedule A. However, like deductible contributions, donors must obtain a written acknowledgement of their contribution from the charitable organization before filing their tax return.
The acknowledgement should include the date and amount of the contribution, as well as information on whether the donor received anything of value in return, as outlined in the Acknowledgement section of Publication 526, Charitable Contributions.
Doeren Mayhew's individual tax pros stand ready to help you make your QCDs before the end of the year.