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Qualified Charitable Distributions: Giving Back

In August 2018, Glenn Ruffenach of the Wall Street Journal interviewed Peggy for an article on QCD’s that appeared in the WSJ on 9/23/18. Notes are edited for length and clarity.

GR: As you know, changes in the tax laws are making Qualified Charitable Distributions (QCD’s) more attractive for some people. My editor has asked me to write an article about QCD’s and how individuals/couples might be able to take advantage of these contributions. In addition to the mechanics, I need some help with the “big picture:” Do some/many/most taxpayers know about QCD’s?

PS: Very few, in my experience. We need to get the word out to everyone over 70½ who has qualified money and makes charitable contributions of any size. It is more important than ever now that the Standard Deduction has doubled, which means many more people will not be itemizing deductions. Those who are not itemizing will not be able to deduct ordinary charitable contributions. However, those who are eligible to make a QCD can take the standard deduction and still be able to deduct charitable contributions, if they are made from an IRA and paid directly to the charity.

GR: Do some/many/most taxpayers understand what QCD’s are and how they work?

PS: Some, but I think not enough taxpayers understand QCD’s, perhaps because they have been on-again, off again since 2006, with lapses and reinstatements every two years. Often the reinstatements come in December, when most people have already taken their Required Minimum Distribution (RMD) from their IRA. This has been confusing and detrimental to taxpayers, as executing a QCD strategy requires advance planning. Many of my clients take their RMD’s monthly throughout the year. If they want to re-direct some to QCD, we need to set that up early in the year, so as to be able to adjust the income stream. Once RMD’s are distributed to the taxpayer, you can’t put them back and re-distribute as a QCD. Fortunately, the PATH Act of 2015, which reinstated QCD’s, also made them permanent, so now proper planning can be done.

For taxpayers who want to learn more, straightforward explanations of QCDs are available in IRS Pub 590b and IRS IRA FAQ’s.

GR: Are some/many/most people already taking advantage of QCDs?

PS: I don’t have data on this, but I believe not enough people are aware and taking advantage of this important deduction. I bring this up with everyone I know who is eligible, and I’ve found that many people, even some very savvy investors, have not heard of it. I also sit on the board of a charitable organization and advise another 501(c)(3) organization. All these folks ought to know about QCD’s, especially the charities, who are currently concerned about lower rates of donation due to fewer taxpayers itemizing their deductions. We should all be getting the word out to development directors at the charities we’re involved with, so that they can alert their donor base. It’s a win-win, taxpayers get to deduct their contributions (if they are eligible), and charities get a more secure income stream. Unfortunately, at this point it seems that most people who could benefit substantially from QCD’s are not aware of how to use them.

GR: What misconceptions, if any, do people have about QCDs?

PS: People think you can’t do this if you take the standard deduction (you can).

People think there is no advantage in taking charitable contributions as an itemized deduction vs. being able to exclude it from income as you do with a QCD. In fact, it can be much better for clients to exclude contributions from income rather than deducting them as an itemized deduction, as the QCD is removed from your Adjusted Gross Income (AGI). Nearly everyone who’s eligible for QCD is also on Medicare, which means their premiums for part B and D are indexed to AGI. For a single person the threshold is AGI of $85k, which is commonly exceeded in my area where cost of living is high. Over that amount you will be charged an Income-Related Monthly Adjustment Amount (IRMAA) on your Medicare premiums. If you can use QCD’s to reduce your Adjusted Gross Income, you may be able to avoid the IRMAA surcharge on your premiums.

Some people have been told that their custodian can’t or won’t do it. You might have to ask for a supervisor, but they can certainly do it. It takes a little extra time, but it is important for their financial well-being.

GR: What are the biggest mistakes people make with QCDs?

PS: Neglecting to keep track of their contributions. Your custodian is not required to report on your QCD’s, so you will get a form 1099-R that shows all your accumulated distributions for the year, both QCD and taxable distributions. It’s up to the taxpayer to keep receipts from the charities and forward this information to your tax professional.

GR: What are the red flags? What should people be aware of?

PS:

• You must be over 70½. That doesn’t mean “the year you turn 70½,” it means wait until the date you are over 70½.
• The funds must be in an IRA, including beneficiary IRA’s, not an employer plan such as a 401(k) or 403(b). SEP and SIMPLE plans can only be used if inactive. If you want to use QCD’s, you’ll need to roll your ERISA plan into an IRA, or convert your SEP or SIMPLE so it’s no longer active and able to receive employer contributions.
• Technically you can make QCD’s from a Roth IRA, but it wouldn’t afford any tax advantage as Roth IRA distributions are tax-free anyway.
• There are special rules for IRA’s with a basis. Be sure to check with your tax advisor.
• Donations must be to a public charity as described by IRC 170(b)(1)(A), not a private foundation or Donor Advised Fund.
• Donations must be eligible for a full charitable contribution, that is nothing of value received by donor in exchange for the contribution.
• The gift should be complete by year-end to satisfy RMD. There are different opinions about whether this means the check must be mailed, received by the charity or cashed by 12/31. To be safe, start early.

GR: Can you do this by yourself? Do you need an “expert?”

PS: You can do it by yourself, but it would be wise to consult with an investment professional and a tax professional, at least the first time, to ensure you’re complying with all the requirements.