Taxes can be highly stressful for seniors with fixed or reduced incomes. Fortunately, the IRS offers several tax deductions to help senior citizens reduce their tax liability. One of the popular initiatives under this program is Qualified Charitable Distributions (QCD).
We will discuss how seniors can reduce taxes by giving to a charity.
What Is a QCD?
QCD is an IRS program allowing IRA owners to deduct their required minimum distributions on their tax return when they donate money directly to approved charities. The QCD rule allows taxpayers 70.5 years or older to deduct the amount they donate from their taxes.
Remember, you must make the Qualified Charitable Distribution directly from your IRA to receive a QCD deduction. An IRA distribution paid to you and then submitted to an eligible charity does not qualify for the deduction.
How Do Qualified Charitable Distributions Work?
The following steps explain how QCD works:
- After deciding to make a QCD, choose a qualified charitable organization.
- Inform your IRS custodian of your decision and specify the amount you are giving.
- The IRS will cut a check on your behalf.
- Your retirement investment firm will then send this check to the organization directly or to you (and you forward it to the charity).
Can Seniors Make a QCD from IRA?
Ideally, several IRAs qualify for Qualified Charitable Distributions, including inherited, traditional, rollover, and SEP. However, there are IRS requirements to make a QCD from IRA.
What are the Qualified Charitable Distribution Requirements for Making a Nontaxable Distribution from IRA?
The IRC Section 408(d)(8) provides the specific criteria for making a nontaxable distribution from IRA:
- The IRA owner should be at least age 70.5 on the date of distribution to make a nontaxable distribution from IRA.
- A beneficiary of an inherited IRA can make the QCD. However, they must be at least age 70.5 on the distribution date.
- The maximum amount of Qualified Charitable Distribution from your IRA is capped at $100,000 per year.
- Married couples filing jointly can each do up to $100,000 as long as each taxpayer’s QCD is sourced from their own IRA.
- Only individual IRA distributions qualify. Distributions from a SEP or SIMPLE IRA and other retirement plans are excluded.
- Qualified Charitable Distribution is also permitted from a Roth IRA.
- You must declare the QCD as income for charitable contribution deduction.
- The amount of a Qualified Charitable Distribution should not exceed the amount of distribution that would count as income.
- The amount of QCD contribution limits for exclusion is reduced once the taxpayer is older than 70.5 years.
What Organizations Can Receive Tax-Deductible Contributions?
As mentioned earlier, your QCD contributions will count only if you make them to a qualified organization.
The following are the qualified organizations that can receive tax-deductible contributions from seniors:
- Most nonprofit charitable organizations like the United Way and US Red Cross
- Most nonprofit educational organizations such as Boy/Girl Scouts of America
- Religious organizations
- Civil defense organizations
- Nonprofit volunteer fire companies
- Nonprofit hospitals and medical research organizations
- Nonprofit organizations that focus on public parks and recreation
- Utility companies’ emergency energy programs are agents of charitable organizations providing emergency energy assistance
How Do You Report a QCD from IRA on Your Tax Return?
Use Form 1040 to report a QCD from your IRA. Report the full amount of your charitable distribution on the IRS distribution line. If all the distribution is a QCD, enter zero on the line for the taxable amount. Afterward, enter QCD next to this line.
Remember, if your Qualified Charitable Distribution originated from a Roth IRA, you must also file Form 8606 with the IRS.
In most cases, the IRS taxes distributions from a traditional IRA in the year the account owner receives them. However, there are exceptions, one of which is the QCD designed to benefit seniors.
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