Many Americans donate to charity each year. Knowing that the money can help an organization that is near and dear to your heart helps you feel warm and fuzzy inside. Getting a federal tax break for the contribution might be an added bonus.
However, these days, most people who donate can’t write off their gifts. That’s because only individuals who itemize deductions on Schedule A of Form 1040 can deduct charitable contributions. And fewer people are itemizing each year because of higher standard deductions. Only 11.6% of federal tax returns for 2021 claimed itemized deductions.
For IRA owners who are 70½ or older, one of the easiest ways to make a charitable donation and get a tax break is by making a qualified charitable distribution from a traditional IRA. For 2023, you can transfer up to $100,000 directly from your traditional IRA to charity. If you have more than one IRA, the $100,000 cap applies per account owner, not per IRA.
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The amount next year will be a bit higher because the Secure Act 2.0 retirement law provides for annual inflation indexing of the $100,000 cap. Qualified charitable distributions are not permitted from employer plans, such as 401(k)s. The tax break applies only if you are 70½ or older on the date of the charitable transfer.
If you are married, you and your spouse can each potentially give up to $100,000 in 2023 from your separate IRAs, provided each of you has a substantial amount in your IRA. But let’s say you have a $70,000 balance in your IRA, and your wife has an IRA worth $1.2 million. In this situation, your qualified charitable distribution cap is limited to $70,000 and your wife’s is limited to $100,000. Your wife won’t be able to make a distribution of $130,000 to make up for your lower gift.
There are three main tax benefits of qualified charitable distributions. They are not taxable. They are not added to your adjusted gross income, which can help you mitigate surcharges on your 2025 Medicare premiums. And they can count toward your annual required minimum distributions. (Note: The first dollars out of your IRA are considered to be required minimum distributions, so if you want to do a qualified charitable distribution that will count toward your required payout, give money to the charity before you take money for yourself.)
But you can’t deduct the qualified charitable distribution on Schedule A. That would be double-dipping.
Only transfers from your IRA directly to charity are considered qualified charitable distributions. Most IRA custodians will require you to fill out a form requesting the charitable payout. The custodian will then either send a check directly to the charity or make a check out to the charity and send it to you to mail to the organization. In either circumstance, get a receipt from the charity to substantiate the donation.
Also, give a heads up to the charity if the check is being sent to it from the custodian. Let the charity know the money will be arriving, and give your name and address for an acknowledgement receipt for your tax records. If you have check-writing privileges on your IRA account, your custodian might let you write the check to charity yourself, but first ask if that’s OK.
Don’t wait until the last minute in 2023 to do a qualified charitable distribution. It can take some time for the money to go from the IRA to the charity, particularly if an investment needs to be sold for cash, and the charity must receive the money by Dec. 31 for your contribution to count for that year.
The money must generally go to a section 501(c)(3) organization. However, there is now a limited exception to this rule. IRA owners can do a one-time qualified charitable distribution of up to $50,000 through a charitable gift annuity, charitable remainder unitrust or a charitable remainder annuity trust. Many private colleges have charitable gift annuity programs. If you’re an alumnus, you may hear about this from your alma mater.
Reporting on your Form 1040
The Form 1099-R that you will get early next year won’t reflect the qualified charitable distribution. The 1099-R will show only the total amount of distributions made from the IRA for 2023.
When filling out your 2023 Form 1040 or 1040-SR, you would include the total distribution amount on line 4a of the 1040. Then subtract the qualified charitable distribution and report the remainder, even if $0, on line 4b. Write “QCD” next to line 4b. If filing electronically, a drop-down box for line 4 should give you a choice to click QCD.
Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.
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