Whether you are preparing to take your required minimum distribution (RMD) from a retirement account this December or are just feeling a bit of charitable holiday cheer, you may be wondering whether a Qualified Charity Distribution (QCD) is a good use of your funds. For many, making a QCD before Dec. 31, 2021, might be a way to support charitable causes while avoiding a hefty tax penalty. Here are some factors to consider when deciding whether to make a QCD this year.
What is a QCD?
A QCD allows individual retirement account (IRA) holders to make a direct IRA distribution to an eligible charity, which generally means a 501(c)(3).1 You may contribute to multiple charities by making a separate QCD for each one.
When Does a QCD Make Sense?
Although you may donate to charity at any age, QCDs are limited to those eligible for RMDs—which, in 2021, is limited to those aged 72 and older.2 Failing to take an RMD may come with a significant excise tax hit of 50%. Taking an RMD that you do not need may significantly increase your taxable income and potentially the top marginal tax rate. Transferring your RMD funds to a charity may eliminate any tax liability associated with these funds.
Generally, a QCD makes sense for those who either do not need their RMD or are trying to keep their taxable income low for other reasons, such as qualifying for certain benefits, estate planning, or sending a child to college.
What is the Deadline for Making a QCD for 2021?
Report QCDs on your income tax return. Because RMDs are subject to a year-end deadline, the deadline for making a 2021 QCD using 2021 RMD funds is Dec. 31, 2021.
If you make a QCD in 2021, you should report it on your April 2022 Form 1040 income tax return. Report the full amount of the charitable distribution(s) on the line for IRA distributions. Next to the IRA distribution, you should enter $0 for the taxable amount if the entire distribution was a QCD and enter "QCD" in the space next to the line.
If only part of your IRA distribution was a QCD, you should enter the total taxable amount of the distribution minus QCD and then enter QCD in the space next to the distribution line.
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