Avoid mistakes with qualified charitable contributions
If you have reached 70 ½, have a traditional IRA, do not itemize your tax return and make charitable contributions, you should consider taking advantage of the qualified charitable deduction (QCD) option to save on income taxes.
For example, if you contribute $10,000 to a qualified charity, and your marginal tax bracket is 28%, you can save $2,800 in federal taxes if you follow the proper procedures regarding QCDs.
In a recent newsletter from Ed Slott and Co. (irahelp.com), Natalie Choate contributed an article pointing out mistakes people can make with QCDs. Here is a list of errors to avoid.
Wrong age: At age 70 ½, you can take advantage of the benefits of QCDs. Although required minimum distributions (RMDs) begin for IRA owners at age 72, if you plan on making charitable contributions to a qualified charity, then it would be to your advantage to take an RMD up to the amount of your charitable deduction.
Wrong account type: You are eligible to use the QCD option if you own a traditional IRA account. You are not allowed to use the QCD option from a SEP-IRA account or SIMPLE IRA account. You also cannot use the QCD option from a 401(k) account. However, if you have the option to transfer some of your 401(k) funds to an IRA account, then you can use the QCD option.
Wrong person: An individual who owns an IRA account can contribute up to $100,000 to a qualified charity in one year from his/her account. But you cannot contribute $200,000 on the basis of a joint return. However, if both spouses have IRA accounts, each owner could contribute up to $100,000 each using the QCD option.
Wrong charity: Most public charities can be used as the recipient of a QCD. However, QCDs cannot be used for contributions to donor-advised funds (DAFs).
Wrong transmission: This requirement is very important. The QCD must be made directly from the IRA custodian, made payable to the charity and mailed from the IRA provider. The IRA owner cannot make the contribution directly from his account; that would not be valid for a tax deduction.
Wrong reciprocity: A QCD is only allowable if the entire amount of the amount sent to the charity qualifies for the federal income tax charitable deduction. The IRA owner cannot receive something valuable back in exchange for the charitable gift. Otherwise, the entire gift will not qualify as a QCD.
Wrong paperwork: In order to receive credit for a charitable deduction in excess of $250, you must receive documentation from the charity regarding the amount of the gift, stating that no goods or services were provided in exchange for the gift.
Deductible IRA contribution restriction: If you make any deductible contribution to an IRA after you reached 70 ½, you have to deduct the amount from your allowable tax deduction. For example, assume you made an IRA contribution in 2019 of $5,000. In 2022, you asked your financial institution to make a charitable contribution to a registered charity from your IRA for $10,000. You will only be able to take a tax deduction of $5,000 (your charitable contribution minus any IRA contribution made after 70 ½). You must provide information about your IRA contributions after 70 ½ to your tax preparer.
Forgetting to take the benefit: When you receive your 1099-R, the amount specified will only show the gross deduction from your IRA, not the amount you had sent to charity. You must notify your tax preparer (or remind yourself if you prepare your tax return) that you made an QCD, so that the tax deduction is included in your tax return.