Q. We don’t need all the cash we get from our Required Minimum Distributions so we are interested in these charitable donations from an IRA I’ve been reading about to reduce the taxes on the RMD. Unfortunately, no one ever says how exactly to get those donations done. Do I write a letter? We usually give to multiple charities throughout the year so that could be a pain in the neck. — Hank in Melbourne
A. Hank, first, thank you for your generosity. There are many non-profits doing great work that need support.
Most institutions that offer IRAs have a distribution request form they will want you to fill out. Done right and accounted for correctly, you will be able to count the donation as part of your Required Minimum Distribution but completely exclude the donated amount from taxable income. That is better than paying yourself the RMD and then cutting personal checks to the charities because some part of donations made by personal check is often not deductible or triggers other costs.
Donations from an IRA are called Qualified Charitable Distributions (QCD). To be eligible, the IRA owner needs to be 70½ or older, the charity must be a qualified 501c(3) charity, the check from the IRA must be made payable to the charity, and the total of all QCD made in 2024 cannot exceed $105,000 per taxpayer.
The institution holding the IRA will issue a 1099-R for the total distributed from the IRA regardless of where those funds went. The 1099-R will not be adjusted for the QCD. You the taxpayer, not the entity issuing the 1099-R, are responsible for determining the taxable portion of the distributions.
For example, if your RMD is $50,000 and you satisfy that by taking $40,000 for yourself and making $10,000 in QCD, you will receive a 1099-R with a gross distribution of $50,000. You put that $50,000 gross distribution from the 1099-R on line 4a, but report taxable portion as just $40,000 on Line 4b, and included a notation “QCD.”
To make donating more spontaneously or donating multiple times during the year a little easier than filling out and submitting a form for each donation, many institutions offer a special checkbook attached to the IRA for the sole purpose of making QCD. Using these special checks can require some additional tracking by you.
When you submit a distribution form to make a QCD, the company holding the IRA will count those funds as distributed when they send the funds from the IRA. When you write a check to a charity with the QCD checkbook, the institution has no idea you wrote the check. As a result, they will not include those sums in the gross distribution until a check is cashed by the charity.
So, Hank if you get a QCD checkbook and send a check from it to a charity late in the year, there is a chance the charity won’t get it cashed by Dec. 31. If you were planning on the QCD to count as part of your RMD for the year and the charity doesn’t cash the check in time, the 1099-R for the year will not show you took the full RMD. Failing to meet an RMD can result in a penalty of 25% or 10% if corrected in a timely manner.
To avoid this problem, you should write the checks early enough in the year that the charity will have no problem cashing it in time and keep tabs on which checks get cashed before year end.
Dan Moisand, CFP® has been featured as one of America’s top independent fee-only financial planners by at least 10 financial planning publications and practices at one of America’s most decorated independent firms. For more info, e-mail him dan@moisandfitzgerald.com, visit moisandfitzgerald.com or call Dan at 321-253-5400, Ext. 101.
