Q: Our church received a check made directly from a member’s retirement account for church general operation needs. Should our church issue a tax-deductible contribution receipt to the donor or just give the acknowledgement for receiving the check?
This is a fairly common occurrence for distributions made from individual retirement accounts (IRAs). It is known as a qualified charitable distribution (QCD). This special provision is a great way for individuals with IRAs to contribute to the church or other charities. Reminding your older donors about this option for donating can help them not only express their generosity but also allow them to reach required minimum distribution (RMD) amounts they may need to meet annually.
Here’s how a QCD works. Individuals over the age of 70½ are able to direct their IRA custodian to make a distribution directly to a church or qualifying charity. Churches and donors must understand that there would be no benefit to having the IRA custodian send the donation if the individual is below 70½.
The donor making the QCD should not receive a tax-deductible receipt for this transaction because this distribution is not treated as taxable. However, an acknowledgement letter should be provided to both the IRA custodian as well as to the donor.
In the annual Church & Clergy Tax Guide, attorney Richard Hammar lists what should be included in a contemporaneous written acknowledgment of $250 or more. Here are the items on the list (adapted) that are pertinent for a QCD:
- Name of church receiving donation;
- Amount of cash contribution; and
- Statement that no goods or services were provided by the church in return for the contribution.
Here are several key points to keep in mind about QCDs:
- The distribution must go directly from the custodian to the charity. It cannot go to the owner and then to the charity.
- The maximum yearly amount for a QCD made by an individual is $100,000. Married couples filing jointly can each make a QCD up to the $100,000 limit from his or her IRA.
- The amount should not be included in the church’s donor system as a tax-deductible gift and neither should a tax-deductible receipt be issued.
- No benefits (“goods or services”) can be given by the church in return for receiving a QCD.
- IRA owners ages 72 and older can make QCDs from their IRAs that will be considered part of their RMDs. A QCD can “satisfy all or part [of] the amount of [a] required minimum distribution from [an] IRA,” according to the Internal Revenue Service’s (IRS) frequently asked questions page about retirement plans.
- Note that RMDs are not required for owners of Roth IRAs, according to the IRS. Roth IRA owners are allowed to make QCDs beginning at age 70½.
- The IRA custodian will issue a 1099-R at the end of the year including all distributed amounts, but the charitable distribution amount will be excluded from the taxable box.
- For the individual or married couple, the QCD should be reported when filing income taxes on Form 1040 (on the line for IRA distributions). If the full amount of the distribution was a QCD, then the amount shown on the taxable amount line is zero and “QCD” should be entered next to it, according to the IRS.
- The IRS says a Form 8606 also must be filed when either the QCD was made from a Roth IRA or the QCD was made “from a traditional IRA in which [the donor] had basis and received a distribution from the IRA during the same year, other than the qualified charitable distribution.”
Note. For additional details on tax rules related to charitable donations, see IRS Publication 526; for specific rules related to QCDs, see IRS Publication 590-B.
