Year-end QCD mistakes to avoid 

Assets in individual retirement accounts are the best assets to give to charity, since theyre loaded with taxes. For those who give regardless, using IRAs to make the gifts can provide tax benefits but only if its done correctly. If not, the tax benefits can be lost.  

Qualified charitable distributions are one of the best ways for IRA owners to receive tax benefits for their donations. QCDs are done by making a direct transfer from the IRA to a qualifying charity. The tax benefit is that the distribution from the IRA is not included in income, where it otherwise would be.   

The only downside to QCDs is that theyre not available to everyone. Only IRA owners and beneficiaries who are age 70 or older qualify. QCDs cant be done from 401(k)s.   

The annual QCD limit is $100,000 per IRA owner, not per IRA account. Properly timed QCDs can also offset required minimum distribution income. Even though the RMD age is now 73, the QCD age has not changed, so QCDs can be done even before RMDs begin.  

Most people no longer receive tax benefits for their charitable gifts since more than 90% of taxpayers dont itemize their deductions. Instead, they use the higher standard deduction, which in 2023, for IRA owners aged 65 or over, is $30,700 for a married couple filing jointly and $15,700 for single individuals. A QCD provides a tax benefit even for people who take the standard deduction because it doesnt count as adjustable gross income.  

These great tax benefits, however, can be forfeited if the QCD rules arent followed. Not surprisingly, that seems to happen more frequently at year-end, when advisors and clients are up against deadlines. Here are the most important QCD pitfalls:  

QCD TIMING ERRORS  

One of the key benefits of using QCDs is that the distribution from the IRA to the charity isnt included in income and can satisfy the RMD amount. However, if an RMD was already taken earlier in the year, a QCD taken subsequently cant offset the RMD income. The QCD will still be excluded from income, but the RMD already taken will be included in income. To avoid that result, make sure to do the QCD first, before taking the RMD.   

WAITING UNTIL RMDs BEGIN  

Some IRA owners think they cant do QCDs until RMDs begin. The QCD age is still age 70 even though the RMD age has been raised to age 73. Missing out on the few years before RMDs begin can mean lost tax benefits for donations that are being made anyway.  

BEWARE OF IRA DEDUCTIONS  

An IRA deduction can invalidate the QCD tax benefit. This became an issue when the original SECURE Act removed the restriction against making traditional IRA contributions after age 70.   

Taking an IRA deduction in the same year as doing a QCD could cause the QCD to be included in income. For example, if a person made a 2023 deductible IRA contribution of $7,500 and also did a $10,000 QCD, only $2,500 of that QCD would be excluded from income. The remaining $7,500 would be a taxable QCD, eliminating the tax benefit. Any amount of QCD not allowed can still be taken as an itemized deduction. However, since most people no longer qualify for itemizing, the QCD tax benefit would be lost. (In certain cases, a deductible IRA can also make a subsequent years QCD taxable.)  

The better option for those who wish to use the QCD is to not make a tax-deductible IRA contribution. Instead, contribute to a Roth IRA. If income is above the Roth IRA contribution limits, use the back-door Roth IRA, where a contribution is made to a nondeductible traditional IRA and then converted to a Roth IRA.  

QCDs VIA CHECKBOOK IRAs   

QCDs that are desired for this year must be completed by year-end. The funds must leave the IRA and go to the charity on or before Dec. 31. In cases in which IRA owners make the QCD gifts using checkbook IRAs, those checks must clear by year-end. If theyre not cashed by the charity, they wont show up as a distribution for this year for tax reporting purposes.   

BENEFICIARY QCDs  

IRA beneficiaries qualify to use QCDs, but they must also be age 70 or older. The fact that the deceased IRA owner was over age 70 at death has no bearing on this. If a beneficiary attempts a QCD before reaching age 70, it wont qualify and wont be excluded from income. In addition, even for qualifying beneficiaries (those 70 or older), the QCD ordering rules still apply. If the IRA beneficiary is subject to RMDs, the QCD must be done before taking the RMD; otherwise, the QCD wont offset the RMD income.  

BENEFITS BACK TO THE IRA OWNER   

By law, the QCD will only qualify if a deduction for the entire distribution would be allowable if made as an itemized deduction, according to Tax Code Section 408(d)(8)(C). You dont have to itemize deductions to qualify for the QCD benefit. But the entire amount of the gift would have had to be deductible if you had itemized. This means there can be no benefit back to the donor, like tickets to a show, dinners, discounts, etc., other than certain intangible benefits or titles. Any benefit received back would void the entire QCD benefit, not just the amount of the benefit. Make sure you receive a contemporaneous written acknowledgement, or CWA, from the charity indicating that you didnt receive any benefit in return.  

A QCD can be a game-changer of a tax benefit. Dont mess it up by failing to follow the playbook.   

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