For those of you with a charitable heart over 70.5, you might have donated to your favorite charity directly from your IRA last year. This gifting strategy, technically called a Qualified Charitable Distribution (QCD), has increased in popularity over the past 12-months, thanks to recent tax reform.
The Tax Cuts and Jobs Act of 2017 brought with it some significant changes that are leading more taxpayers to use the standard deduction. One of these changes is the 2x increase in the standard deduction (now, $12,000 / single and $24,000 / married filing jointly). Combine this with the $10,000 cap on the deduction of state and local income and property taxes, and many taxpayers are finding that the standard deduction is a more favorable claiming strategy than itemizing their deductions.
In this case, a QCD is a win-win for both you, and your charity of choice. By gifting directly from your IRA, you can fulfill your required minimum distribution (in full or in part) and exclude the amount of that gift from your taxable income. QCD’s are capped at $100,000/year per IRA owner.
With that background, there are some unique things to remember as you prepare to file your 2018 return:
Your 1099 will report the total distributions from your IRA for the year, including any amount you sent to a charity via QCD. It will not denote any amount that was sent directly to a charity.
If you use a tax professional to prepare your return, you must notify them of your QCD. Since it’s not indicated on your 1099, they won’t know unless you tell them. For our client families, we send a letter to the charity notifying them of the gift, then send a copy of that letter to our clients for their tax file. This provides a good paper trail that includes the recipient, amount and date of the gift. Regardless of how you do it, it’s imperative that you keep a record of the donation provided by the charity.
If you file your own return, here’s how to report your QCD:
- On line 4a, enter the total amount reported on your 1099 (the total amount distributed).
- On line 4b, you will enter only the amount that is taxable, which excludes your QCD. The IRS recommends writing ‘QCD’ on line 4 between boxes 4a and 4b. For more detail directly from the IRS on this, look to page 29 on the 1040 guide.
For example: your 1099 reports a total of $15,000 in distributions in 2018. $5,000 of that distribution went directly to your favorite charity, the remaining $10,000 went into your checking account. Therefore, on line 4a, you would enter $15,000 and on line 4b, you would enter $10,000.
If you have any questions or concerns about how to report your QCD, we highly recommend you connect with a tax professional.
To utilize this gifting strategy, you should:
- Be at least 70.5-years-old at the time the QCD is made.
- Have a charitable heart.
- Have an IRA account that is subject to required minimum distributions and send the gift directly from your IRA to your charity of choice.
- Have a plan in place that assures your gifting will not compromise your long term security.
While we can’t impact points 1 or 2 above, we can help with points 3 and 4. Working together with your tax professional we can help assure that you’re gifting in the smartest way possible.
This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor or plan provider.
