The Practical Aspects of Qualified Charitable Distributions From a Traditional IRA
By Alan E. Weiner, CPA, JD, LL.M
Attention Professionals: You will want to become familiar with the techniques described herein if you are over 70 ½ or you have clients, relatives or friends who are over 70 ½.
This article is inspired by what the author experienced as a result of the Tax Cuts and Jobs Act (TCJA)(1). For the wealthy contributors with substantial Individual Retirement Accounts (IRAs), this technique works only for the first $100,000 annually of Qualified Charitable Distributions (QCDs). (2)
It’s the end of 2019, and it may be too late this year for you to take advantage of what you are about to learn. Note that if you have not yet taken the full amount of your 2019 Required Minimum Distribution (RMD), the technique is still available for 2019 but you’ll be under time pressure to accomplish it.
Before the enactment of the TCJA, which became effective in 2018, charitable contributions could be made from your IRA or with personal funds. While that’s still true, you might not be receiving a tax benefit. Before the TCJA became effective, charitable contributions could be deducted on your personal income tax return if you itemized deductions. You received a tax benefit (i.e., because your taxable income was lower) based on your income tax percentage bracket.
Because the standard deduction was increased substantially under the TCJA (e.g., to $27,000 for a senior married couple filing jointly for 2019), many senior citizens found that it no longer was beneficial to itemize deductions; therefore, charitable contributions that they made no longer yielded a tax savings.(3)
Although the following technique has been well publicized, many taxpayers 70 ½ or over still are not aware of it, and for those taxpayers who are aware of it, they may not be aware of the technical and practical aspects of using it.
First, an example to show the tax savings by making a QCD: The taxpayer is notified from his financial institution that his RMD for 2019 is $32,000. If he makes qualified charitable distributions on or before December 31, 2019 of $3,000, he will pay a federal tax(4) on only $29,000. If he made the $3,000 of charitable contributions with personal checks, he gets no tax benefit because the couple claims the $27,000 standard deduction. Put another way, if the couple has allowable income tax deductions in 2019 of less than $27,000, they will not itemize their tax deductions on their form 1040.
The effect of making contributions of $3,000 as QCDs is as though it was claimed as a tax deduction under the old law. A couple in the 32% federal tax bracket will save about $1,000 on the $3,000 QCDs.
To take advantage of the QCD rule, the taxpayer must be at least 70 ½ when the charitable contribution is made.5 That requirement is literal. Just because a taxpayer will reach 70 ½ during the taxable year does not make the taxpayer eligible from January 1 of that year. If a taxpayer will be 70 ½ on April 30, QCDs cannot be made until that date or later. Distributions from the IRA made before that date will qualify towards the annual RMD but will not qualify as a QCD and, therefore, will not yield a tax benefit.
Issuing the Contribution
Because of the change in the tax law beginning in 2018, it would have been wise to make one’s charitable contributions from one’s IRA. Such contributions would be treated as part of the 2018 RMD and also would yield a tax savings.
The charities must be qualified, i.e., recognized by the Internal Revenue Service (IRS) as what is commonly referred to as a §501(c) (3) charity. Some charities are easily recognizable as qualifying e.g., St. Jude. Alzheimers, and Wounded Warriors, as well as churches, synagogues and mosques. If you want to be assured of a charity’s recognized status, you can search IRS Publication 78;(6) Guidestar.org(7) or Charity Navigator.(8) You also can ask the charity.
One way of authorizing the contribution is by completing the financial institution’s paperwork, authorizing the check from the IRA to be made payable to the chosen charity and mailing (or faxing) the executed paperwork to the broker. Where the contributor knows the people operating the charity, he/she can alert it that the contribution check would be forthcoming. This is important because the check that the financial institution sends has no information on it as to who it is coming from, or to which fund/ scholarship it should be credited, or where to send the thank you charitable receipt. In cases where the contribution is being made to a large charitable organization, the donor should have the check sent to him/her who in turn forwards the check to the charity with the detailed information as outlined above. Planned Parenthood, in its request for contributions, says:
“Some companies do not provide the donor’s name with the IRA distributions. Email or call us with the name of your financial institution and amount of your gift.”
It is possible that other financial institutions may allow additional information, such as the donor’s name and purpose of the contribution, to be included on the check. Some financial institutions and articles state or infer that the check must go directly from it to the charity; that is not correct. The requirement is that the check must be made out to the charity. It can be sent to the donor for forwarding to the charity. For QCD purposes, the taxpayer cannot receive the IRA check in his name and then draw his personal check to the charity.
Most charities will mail a receipt in the form of a letter to the donor. If the contribution is for $249 or less, a receipt is not necessary for tax purposes but if the contribution is $250 or more, a receipt is mandatory(9) for tax purposes even though the payment is made from an IRA. Also, if no goods or services were exchanged in return for the contribution, it is mandatory(10) that the receipt state that.
The ‘no goods or services’ requirement can be tricky. Some charities, museums for example, indicate on the receipt that a portion of amount paid qualifies as deductible and a (generally small) portion is not deductible. The entire payment to the museum would not qualify as a QCD because the statute(11) states that it’s a QCD “only if a deduction for the entire distribution would be allowable…”, and if you thought that you could pay the museum with two checks—one from the IRA as a QCD and a personal check for the non-deductible portion, the deduct ible portion might not qualify as a QCD because you cannot be a member of the museum without the entire amount being paid. The Metropolitan Museum of Art does not permit bifurcation. It requires a payment of the full amount of its membership dues and if you want its literature (i.e., goods and services), you must submit an extra personal payment of $30.
While the IRS position is that bifurcation is clearly prohibited with regard to donor advised funds(12) and private foundations,(13) the Internal Revenue Code sections for those entities do not apply to IRAs. There is nothing on point for IRAs. After reading all of the available dissertations on the subject, it is clear there is confusion as to bifurcation (i.e., two checks) where an IRA is involved.
An easier, less burdensome way to make the QCD (and avoid getting the financial institution involved) is to have the financial institution give the donor check writing privileges over his/her IRA so that he/she can write out the check to the charity. The contributor should include a note, sent along with the check, with the pertinent information. The note should contain the contributor’s name and address; his/her telephone number; and email address. Request a receipt and request that the receipt include the mandatory language (required by the IRS) that “no goods or services were exchanged in return for the contribution”. If the contribution is to be designated to a specific fund or in memory of someone or honoring someone, add that to the note.
Some financial institutions will not permit check writing privileges and others, although allowing check writing privileges, require that the QCD be at least $250.
For the balance of your annual RMD, you can write out an IRA check to yourself instead of having the financial institution send you a check or transfer funds to another of your accounts.
The advantages of obtaining check-writing privileges for the taxpayer’s IRA are several:
1. You don’t have to complete the financial institution’s form for each qualified charitable distribution.
2. You don’t have to fax (or mail) the forms to the financial institution.
3. The broker’s assistant doesn’t have to prepare the distribution checks and mail them to you.
4. You don’t have to wait several days to receive the QCD checks which you then must mail to the respective charities.
After the close of the calendar year, the financial institution will send a form 1099- R,(14) Distributions From … IRAs… to the IRA holder. The financial institution takes no responsibility as to whether the withdrawals are QCDs. As a result, the 1099-R will show the total year’s distributions from the IRA no matter to whom they went. The taxpayer, on his/her tax return, reports the total distributions, per the form 1099-R, on line 4a of form 1040(15) or form 1040-SR(16) and reports the taxable amount (after subtracting the QCDs) on line 4b. To the left of line 4b, the taxpayer writes QCD. By answering the questions in the taxpayer’s software, QCD automatically will appear where it belongs on the 1040 or 1040-SR. The taxpayer is not required to list the charities to which the QCDs were made.
Form 1040-SR is a new form for 2019. It’s designed to be used by seniors (taxpayers born before January 2, 1955). Seniors are not required to file on the 1040-SR. Instructions for the 1040-SR are included in the form 1040 instruction booklet.
Some other important rules for QCDs are:
1. The tax benefit of a QCD only is available for the first $100,000 annually.(17) For a married couple, if each has his/her own IRA, each spouse can make his/her own $100,000 QCD for a $200,000 total QCD. Any charitable distribution from the IRA over the $100,000 maximum still will qualify towards the taxpayer’s RMD but will not yield a tax benefit, i.e., will not reduce the donor’s income tax liability for the year.
2. A QCD is not available for a contribution to a donor advised fund.(18)
3. Since a QCD reduces the net reportable amount of income, it reduces the taxpayer’s adjusted gross income which may reduce the taxpayer’s Medicare premium and the taxable portion of social security.
4. No matter when the check is mailed, mail the QCD check and covering letter via certified mail, return receipt requested. If it’s a substantial QCD, follow up with the charity to make sure that the QCD was received by the charity. It is believed that a check written out by the IRA donor must be deposited by the charity by year-end to qualify as a QCD.
Alan E. Weiner, CPA, JD, LL.M. was the founding tax partner of Holtz Rubenstein Reminick (1975) which was merged into an international CPA firm in 2013. He is active on the tax committees of the Bar Association of Nassau County and the New York State Society of CPAs, for which he served as the 1999-2000 President and also as a Chairman of its Tax Division Executive Committee. He is a past chairman of the Partnership/LLC Tax Committee of the NYSSCPA.
1. Tax Cuts and Jobs Act of 2017-Public Law 115–97— Dec. 22, 2017. https://www.congress.gov/115/plaws/ publ97/PLAW-115publ97.pdf
2. Internal Revenue Code § 408(d) (8) (A).
3 Richard Eisenberg, Charitable Giving Took A Hit Due To Tax Reform, Forbes, June 18, 2019, available at https:// bit.ly/2OujbRR.
4. State taxes are not considered in this article.
5. IRC § 408 (d) (8) (B) (ii).
9. IRC § 170 (F) (8).
11. IRC § 408 (d) (8) (C).
12. Notice 2017-73, Request for Comments on Application of Excise Taxes With Respect to Donor Advised Funds in Certain Situations, available at https:// bit.ly/2XwImas; Getty Trust, Comments on Application of Excise Taxes with Respect to Donor-Advised Funds (Notice 2017-73), available at https://bit.ly/2Xz2CYV; Jewish Federations of North America Seeks Guidance on Effect of PPA Provisions on DAFs, available at https://bit. ly/2O74Z20. Robin Krause, John Sare and Justin Zaremby, Keeping it Together: Foundations, DAFs, and the Problem of Bifurcated Payments, (Dec. 31, 2015), available at https:// bit.ly/2qmsz24.
13. PLR 9021066, available at https://bit.ly/35eKOFc. “In a March 1, 1990, private letter ruling involving a corporate foundation (PLR 9021066), the IRS states that such “bifurcation” would constitute self-dealing, as would “any funding approach whereby [the corporate foundation’s] funds were used to permit [the corporations’] executives to attend.” Again, the ruling applies only to the taxpayer that requested it but provides evidence of the IRS’ general attitude.” Available at https://bit.ly/37gWKrQ.
17. Internal Revenue Code § 408(d) (8) (A).
18. Kim T. Mollberg New Life for IRA Qualified Charitable Distributions, Journal of Accountancy (Oct. 1, 2018), available at https://bit.ly/3336Yc3.
Republished with permission, The Nassau Lawyer (2019)
Postscript to The Practical Aspects of Qualified Charitable Distributions From a Traditional Individual Retirement Account Reprinted from The Nassau Lawyer
By Alan E. Weiner CPA, JD, LL.M.
Subsequent to the completion and publication of the above article, the Setting Every Community Up for Retirement Enhancement Security Act (commonly referred to as the SECURE Act) was enacted on December 20, 2019[i].
Although the SECURE Act includes significant changes affecting retirement accounts, this postscript is limited to only one aspect of the Act which impacts qualified charitable distributions (QCD), the subject of the aforementioned article.
On and after January 1, 2020, anyone reaching age 72 during the calendar year can make a QCD which will count towards his/her required minimum distribution (RMD) for the calendar year no matter when in the year his/her birthday is. This is a change from the prior law which allowed RMD distributions to be made from January 1st in the year that the taxpayer would reach 70 ½ but required the taxpayer to wait until he/she actually reached 70 ½ before allowing the taxpayer to count the QCD as part of the year’s RMD.
Rephrasing the above principle, there are two statutes involved. One which permits a QCD after the taxpayer has reached 70 ½ (this is not changed by the SECURE Act-it remains in force[ii]) and the other statute which changes the age for RMDs to age 72[iii]. This may sound funny, but by the time a taxpayer reaches age 72, he/she will be older than 70 ½ and, therefore, will be permitted to make a QCD on day 1 on his/her 72nd year.
Example: It is 2022. The taxpayer will reach age 72 sometime during the year. The taxpayer can start taking his/her RMD on January 1, 2022 and can begin to make a QCD on the same date or any time thereafter in 2022.
This postscript addresses only taxpayers who reach age 72 on and after January 1, 2020. It does not address taxpayers who were under age 72 before January 1, 2020 nor does it address taxpayers who were 70 ½ before the aforementioned date.
In addition to the biographical material included in
the biography at the end of the article, Alan E. Weiner also is a longtime
member of the Suffolk County Bar Association who has written and spoken for the
SCBA and currently serves on its Elder Law and Estate Planning Committee, its
Surrogate’s Court Committee and its Tax Law Committee.
[i] https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-116HR1865SA-RCP116-44.PDF See Sec. 114, pages 1584-1585.
IRC 408 (d) (8).
I.R.C. § 401(a)(9)(C) Required Beginning Date.