Mechanics of qualified charitable distributions

[donheff]

I would like to start making some QCDs since I no longer itemize and am making the contributions anyway. From what I have read the distributions must be less than or equal to your RMD amount and must go directly from the IRA custodian to the charity. It looks like it is too late to take advantage of QCDs this year because only I have RMDS and my tax deferred is in the TSP where I can't do the direct distributions.

My plan is to roll over a portion of the TSP to a tIRA before the end of the year and start QCDs next year. I am planning to use Schwab unless someone is aware of a better place for this purpose. Schwab will enable direct distributions (which would only make sense for largish donations) and also will attach check writing to the account which I believe will also qualify as a direct distribution. Schwab told me they will report all of the distributions as normal distributions on a 1099 becuase IRS provides them with o way to distinguishe QCDs from regular distributions. I will have to deal with that on my tax filing.

I'm hoping some of you are doing this already and can help me avoid any gotchas with IRS. First, are checks written to charities from the account OK for QCD's? I would anticipate a few moderate sized checks and a lot of little ones. Second, is it easy to specify that some of the RMDs went to charities when filing? I have been using Turbo Tax and hope they have screens that ask the question and make the reduction in taxable income. Any additional thoughts or considerations?

Thanks in advance for any help.

 

[Spock]

You can donate more than RMDs. From Fidelity: The maximum annual amount that can qualify for a QCD is $100,000.


writing checks: this will depend on your IRA custodian, but I am not aware of IRA accounts that you can write checks from making distributions from the IRA. I expect there will be qty limits... like 4-6 donations per year.
The custodian distributes based on instructions you provide.

1st off make sure the charities you have in mind are eligible for QCDs.

 

[donheff]

Thanks Spock. I see now that I can make larger QCDs but I won't be exceeding the RMD amounts. When I talked to Schwab they said I can have checking against an IRA and didn't mention any limits. I will confirm.

 

[kaneohe]

If you write checks from the IRA, you may wish to do these earlier in the yr so that they are cashed and debited from the account before the end of the yr so they count for this yr. If the custodian writes the check, they are debited from the account immediately so the timing is not as critical.
I am not familiar w/ TT but it would surprise me if they didn't have a way to designate the QCD. You need a way to track those so you can recognize if TT is doing it correctly.

I give Schwab a letter listing the QCDs I want to make.........name of organization & $$ amount, tell them not to withhold anything and ask them to send the checks to my home address. Typically the checks are generated within a week and received within a wk so total turnaround time is less than 2 wks. So far I've been very pleased w/ speed and accuracy
(no booboos yet).......typically 18/yr for many yrs.

 

[Bir48die]

You can donate more than RMDs. From Fidelity: The maximum annual amount that can qualify for a QCD is $100,000.


writing checks: this will depend on your IRA custodian, but I am not aware of IRA accounts that you can write checks from making distributions from the IRA. I expect there will be qty limits... like 4-6 donations per year.
The custodian distributes based on instructions you provide.

1st off make sure the charities you have in mind are eligible for QCDs.

Agree. Met a nice couple a few years ago doing volunteer taxes. They did QCD for some substantial money to several different charities. It was my first year of doing taxes so I had a number of people assist me in this. Long story short I also gave them a charitable deduction on this amount (obviously incorrect). Days later it ate at me thinking I did this wrong. Well, sure enough the couple came back in the next year and someone else was doing their taxes. I stepped in because the person was having the same dilemma. I fessed up that I thought I prepared it incorrectly and we all researched and lo and behold it was confirmed to be wrong. It then created a liability and an amendment for the prior year. A decent amount they owed. I was so sorry and the dear older lady just said "that's ok, we have plenty of money".

 

[donheff]

Agree. Met a nice couple a few years ago doing volunteer taxes. They did QCD for some substantial money to several different charities. It was my first year of doing taxes so I had a number of people assist me in this. Long story short I also gave them a charitable deduction on this amount (obviously incorrect). Days later it ate at me thinking I did this wrong. Well, sure enough the couple came back in the next year and someone else was doing their taxes. I stepped in because the person was having the same dilemma. I fessed up that I thought I prepared it incorrectly and we all researched and lo and behold it was confirmed to be wrong. It then created a liability and an amendment for the prior year. A decent amount they owed. I was so sorry and the dear older lady just said "that's ok, we have plenty of money".

I am not sure what you are agreeing to. From what these folks publish online as long as the check is from the IRA and to the charity and the charity qualifies, then it can be deducted as a QCD. Schwab confirms they do checks from IRAs. Is there a gotcha I am missing?

 

[braumeister]

I am not sure what you are agreeing to. From what these folks publish online as long as the check is from the IRA and to the charity and the charity qualifies, then it can be deducted as a QCD. Schwab confirms they do checks from IRAs. Is there a gotcha I am missing?

A QCD is not a "deduction" so that might be the disconnect. It counts against your RMD, so it's not included as income, but it's not a charitable deduction from income.

You probably already understand this. Just a terminology thing.

 

[kaneohe]

I am not sure what you are agreeing to. From what these folks publish online as long as the check is from the IRA and to the charity and the charity qualifies, then it can be deducted as a QCD. Schwab confirms they do checks from IRAs. Is there a gotcha I am missing?

"They did QCD for some substantial money to several different charities. It was my first year of doing taxes so I had a number of people assist me in this. Long story short I ALSO gave them a charitable deduction on this amount (obviously incorrect)".

Not sure this is what happened but my impression is that the QCD was entered correctly (via reduction of gross distribution to get net taxable amount) and (emphasis mine) ALSO a charitable deduction was taken making for a double-dip and causing taxes to be lower than they should have been.

 

[donheff]

"They did QCD for some substantial money to several different charities. It was my first year of doing taxes so I had a number of people assist me in this. Long story short I ALSO gave them a charitable deduction on this amount (obviously incorrect)".

Not sure this is what happened but my impression is that the QCD was entered correctly (via reduction of gross distribution to get net taxable amount) and (emphasis mine) ALSO a charitable deduction was taken making for a double-dip and causing taxes to be lower than they should have been.

Ah. That I get. We switched to the standard deduction which is why I am looking at this.

 

[OldShooter]

Our experience is that QCDs are trivially easy.

Our IRAs are at Schwab. Shortly after we got into RMD territory we each received a small packet of checks, maybe ten or twenty. We simply send one of those checks to a charity and we're done. Schwab is not involved in the payee or in providing any documentation, so we have to keep track in order to do our taxes. Following the QCD rules is up to us, like no QCDs to donor-advised funds.

We use those checks even for relatively small donations, like annual public radio membership. And why not? Effectively every check is a tax deduction. This also allows us to take the standard deduction. OP, I suggest you get this done ASAP if you plan to make any further charitable deductions this year. There's no reason to wait. At best it might save you some money and at worst it won't cost anything.

 

[audreyh1]

I would like to start making some QCDs since I no longer itemize and am making the contributions anyway. From what I have read the distributions must be less than or equal to your RMD amount and must go directly from the IRA custodian to the charity. It looks like it is too late to take advantage of QCDs this year because only I have RMDS and my tax deferred is in the TSP where I can't do the direct distributions.

My plan is to roll over a portion of the TSP to a tIRA before the end of the year and start QCDs next year. I am planning to use Schwab unless someone is aware of a better place for this purpose. Schwab will enable direct distributions (which would only make sense for largish donations) and also will attach check writing to the account which I believe will also qualify as a direct distribution. Schwab told me they will report all of the distributions as normal distributions on a 1099 becuase IRS provides them with o way to distinguishe QCDs from regular distributions. I will have to deal with that on my tax filing.

I'm hoping some of you are doing this already and can help me avoid any gotchas with IRS. First, are checks written to charities from the account OK for QCD's? I would anticipate a few moderate sized checks and a lot of little ones. Second, is it easy to specify that some of the RMDs went to charities when filing? I have been using Turbo Tax and hope they have screens that ask the question and make the reduction in taxable income. Any additional thoughts or considerations?

Thanks in advance for any help.

I plan to use a checkbook that draws on the IRA to do this. I believe Fidelity can supply such a thing. AFAIK this satisfies the direct to charity requirement. It’s not as anonymous or convenient as using a DAF, oh well.

 

[Golden sunsets]

We did QCD's for the first time in 2018, our first year of claiming the standard deduction. It was fairly straightforward in that we sent a list to our broker of the recipients, amounts, addresses, etc. Our broker is Merrill Lynch. They scheduled a call with us to go over the distributions and took care of the paperwork. We received duplicates of the letter that accompanied the checks for our records. These letters along with our spreadsheet were provided to our tax preparer, so that he could adjust the brokers 1099, which as you stated does not differentiate between RMD's and your QCD's.

In 2019, we desired to pay some of our charities during the year, so we schedule quarterly distributions, to minimize time and paperwork. The bulk of our distributions however go out in the 4th quarter. In fact we will schedule that call for next week.

We also pay no taxes during the year, and withhold 100% of our federal and state taxes from our RMD in late December when we have a solid estimate of our annual tax liability. This method of paying our taxes has a twofold benefit. 1) Better up front cash flow during the year and 2) paying taxes in December which are within dollars of our actual liability.

 

[Bir48die]

A QCD is not a "deduction" so that might be the disconnect. It counts against your RMD, so it's not included as income, but it's not a charitable deduction from income.



You probably already understand this. Just a terminology thing.

Bingo

 

[kaneohe]

Interesting thing happened this year........has never happened before with
donations to other recipients or even to the same recipient in prior yrs. I got
a receipt promptly after making the contribution. I did notice however that the receipt said "not a receipt for IRS purposes". I thought that it was just a preliminary acknowledgement of the gift and that an official receipt would come later.

3 wks later and nothing so I went back to read the original confirmation.......I had missed on the first reading........something like "thanks for your donation from the XXX Charitable Fund which was sent to us at your request". I wasn't sure what the XXX Charitable Fund was so Google to the rescue.

Turns out that Charitable Fund is a DAF (donor advised fund) where presumably I had taken a deduction when I made a contribution to the Fund but I would not get a "deduction" when I make a contribution to the charity itself. I do not have a DAF and this is definitely from my IRA.

I am now in the process of trying to straighten this confusion up so no resolution yet. Seems like it takes some level of sophistication to make this kind of error so some gentle re-education will need to take place.

Just something to look out for................could be an unpleasant surprise if discovered by IRS.

 

[pb4uski]

That does sound strange... only thing that I can think of is that for some reason your IRA administrator pushes the money to a DAF and then the DAF pushes it to the charity... but I'm not sure why it would not go directly to the charity other than perhaps it is more administratively convenient for your IRA administrator to do it through the DAF.

 

[OldShooter]

That does sound strange... only thing that I can think of is that for some reason your IRA administrator pushes the money to a DAF and then the DAF pushes it to the charity... but I'm not sure why it would not go directly to the charity other than perhaps it is more administratively convenient for your IRA administrator to do it through the DAF.

If true, that would be a big problem. QCDs cannot go to DAFs. If an IRA custodian had done that I would be going after him for compensation and talking to a CPA about whether it would be necessary to undo the deed. Probably a "QCD" that went to a DAF could just be omitted when taxes are filed, at which point it would be just a normal taxable distribution with all the usual consequences.

 

[pb4uski]

Good point that QCDs can't go to a DAF... I knew that but didn't think of it.... it'll be interesting to see what kaneohe finds out.

 

[kaneohe]

No official findings yet. My theory.....the check has the words "donor:Me"
on it. It also has the name of the broker. The recipient processing the check saw those and assumed it was coming from the broker's DAF by mentally adding the words Charitable Fund to the broker name. I do not have a DAF.

I also noticed that the blank IRA checks that I have for personal check writing have the words IRA Rollover on them. There is no word "Donor" on them.

It would probably help to have the word "IRA" printed on the checks that the broker issues. I suggested that to the broker to make the process more robust. They suggested that when I submit my annual request that I ask them to add the word "IRA" to the memo line along with the current "Donor:Me" notation.

I have never had this problem in past yrs w/ multiple recipients. This yr only one recipient had this problem...........you can only have the problem if you know about DAF so it requires a certain level of sophistication to make this error.

 

[OldShooter]

If you have the IRA QCD checks, why is the broker in the deal at all? In our case (Schwab) we just write the checks, keep track of the recipients, and fill out the tax form accordingly. No one from the broker is ever involved.

 

[kaneohe]

If you have the IRA QCD checks, why is the broker in the deal at all? In our case (Schwab) we just write the checks, keep track of the recipients, and fill out the tax form accordingly. No one from the broker is ever involved.

I have both........the checkbook is for unplanned giving that needs to be done in a hurry. The broker prepares the bulk for the planned checks.

 

[OldShooter]

FWIW, all of our charitables are done via the QCD checks. I think the biggest single check this year was $10K and the smallest was probably my public radio membership check. For us, it's painless.

 

[audreyh1]

That does sound strange... only thing that I can think of is that for some reason your IRA administrator pushes the money to a DAF and then the DAF pushes it to the charity... but I'm not sure why it would not go directly to the charity other than perhaps it is more administratively convenient for your IRA administrator to do it through the DAF.

How could an IRA administrator push the money to a DAF? That’s just not right unless explicitly instructed to do so.

Personally we plan to write checks on the IRAs for QCD donations once we are RMD age.

Main thing is getting back the acknowledgements. And that’s required whether the broker or we write the checks.