If you have a traditional IRA, you will need to start collecting distributions when you reach age 70.5. The amount of these required minimum distributions (RMDs) depends on your age and the value of your account. Failing to withdraw enough results in a large penalty. You will need to pay federal income tax on your IRA RMDs, but you may not have to if you donate your RMD directly to a qualified charity. This is called a qualified charitable distribution. You may also see it called an IRA charitable rollover. Let’s look at how these distributions work.
What Is a Qualified Charitable Distribution?
Traditional IRAs require you to make RMDs once you reach age 70.5. Because you did not pay federal income tax when you contributed the money to your account, you need to pay tax when you withdraw it. However, you can avoid the tax on that distribution by making a donation directly from your IRA to a charity. This is called a qualified charitable distribution (QCD). You may also see it called an IRA charitable rollover.
How Qualified Charitable Distributions Work
In order to make a QCD, you need to donate straight from your IRA to a qualified charity. The money never hits another of your personal accounts. A charity can qualify for a tax-deductible, qualified charitable distribution if it is a 501(c)(3) organization. Private foundations, donor-advised funds and supporting organizations do not qualify.
You need to be at least 70.5 to make a QCD, and the maximum annual exclusion for QCDs is $100,000. That means you can deduct up to $100,000 in charitable contributions from your income taxes. If you file a joint return, you and your spouse each have a $100,000 exclusion limit. You will need to pay income tax on any distributions above the exclusion limit. Note also that it is possible for a QCD to cover your entire RMD.
You can deduct this contribution from your taxes even if you take the standard deduction or don’t itemize deductions in your federal income tax return. State laws may vary so it’s a good idea to talk with a tax expert if you have specific questions.
You may also be able to make QCDs from SEP and SIMPLE IRAs.
Reporting a Qualified Charitable Distribution on Your Taxes
You will report a QCD the same way you would report a normal distribution from your IRA. Use Form 1099-R for the tax year that you made the distribution. So if you made the distribution in the 2018 tax year, report it on Form 1099-R with your 2018 tax return.
On your Form 1040, report the full amount of the QCD on the line for IRA distributions. If the amount covered your entire RMD, enter a zero on the line asking for the taxable amount.
If you made a QCD but it did not cover your entire your entire RMD, you will need to make an additional distribution. You will need to file Form 8606, Nondeductible IRAs, to report that you made this additional distribution.
A qualified charitable distribution, also called an IRA charitable rollover, allows you to lower your tax bill if you contribute money directly from your traditional IRA to a charity. The charity needs to be a 501(c)(3) organization, and you can deduct up to a limit of $100,000. You have the same personal limit even if you file a joint return. You will need to use Form 1099-R to report this distribution. You will also need to file Form 8606 if your QCD doesn’t cover your entire RMD.
Tips for Saving on Your Taxes
- You do not need to itemize in order to deduct your QCDs. You can still itemize if you’d like, but because of the Trump tax plan passed in December 2017, it’s important to make sure you know who should itemize under the new tax plan.
- The tax code is complex. You can do your own research online and through the IRS website, but that’s no substitute for expert advice. A financial advisor who specializes in taxes can help you maximize your tax savings.
- A thorough and user-friendly tax filing service is also a big help. Two of the most popular services are H&R Block and TurboTax. Both offer a straightforward filing process with clear explanations of different forms and tax laws. Here’s a guide to help decide in H&R Block vs. TurboTax.
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