3-Oct-18
Qualified Charitable Distributions – Checklist
Take-Away: I was asked to prepare a short ‘checklist’ to follow to determine if an individual can take advantage of the qualified charitable distribution. The qualified charitable distribution can satisfy the individual’s required minimum distribution (RMD) for the calendar year, which in turn reduces their federal income tax liability for the year. A qualified charitable distribution is equivalent to a 100% income tax deduction. The recently expanded income tax standard deduction is remains available to that individual who chooses to make a qualified charitable distribution from his/her IRA. It is critically important to contact individuals before they take their full RMD for this calendar year, as there are no ‘do-overs’ if the individual has already taken their full RMD for the calendar year- if that’s the case, it will be too late.
Who: Any traditional IRA owner who is then age 70 ½ (not before actually reaching that age.)
What: Transfers of cash by the IRA custodian from any traditional IRA, Roth IRA and inactive SIMPLE and SEP IRAs. Excluded: Qualified plan accounts, e.g. 401(k) and tax sheltered annuities.
When: No later than December 31, 2018.
How Much: No more than $100,000 per year per individual.
How: A direct transfer is made from the IRA custodian to the charity. (A check from the IRA account made payable to the charity can be given to the individual for physical delivery to the charity; that will be treated as a direct payment from the IRA.)
No Carry-Overs: There are no ‘carry-overs’ of excess qualified charitable contributions (i.e. amounts above $100,000) to the donor’s future tax years.
No Income Tax Charitable Deduction: Since the qualified charitable contribution is not included in the individual’s taxable income for the calendar year, no current federal income tax charitable deduction can be claimed by the donor.
To What Charity: Any tax exempt entity. Excluded: Grant making foundations and donor advised funds.
Proof: Like any charitable gift there needs to be substantiation of the charitable donation, in writing, received from the charity that reports the date and amount of the qualified charitable contribution.
No Indirect Benefits: There can be no benefit ‘back’ (quid pro quo) to the individual for the qualified charitable distribution, e.g. no dinners, mugs, calendars, or other gratuities received from the recipient charity.
Pledges: A qualified charitable distribution can be used to satisfy an individual’s outstanding pledge without causing a prohibited transaction with regard to their IRA under the Tax Code.
Tax Reporting: The current Form 1099-R does not separately report the qualified charitable distribution, i.e. no unique code or box is checked on that Form. Thus, thus there exists the need to expressly report the qualified charitable distribution on the individual’s Form 1040 for the year to alert the IRS that a qualified charitable distribution was made from the taxpayer’s traditional IRA in satisfaction (whole or in part) of the taxpayer’s RMD for the year.
Conclusion: The qualified charitable deduction will almost always save the individual income taxes; it will never increase an individual’s income tax liability. Individuals over age 70 ½ should always consider a qualified charitable distribution BEFORE they begin to take their required minimum distribution for the calendar year from his/her traditional IRA.