Take-Away: While a qualified charitable distribution (QCD) is made directly by the IRA custodian to the designated charity, a contemporaneous written acknowledgement (CWA) is still required from the charity for the QCD to be recognized for tax reporting purposes.
Background: A qualified charitable distribution (QCDs) is a simplified common form of charitable giving by older individuals these days. The gift is not deductible, but it satisfies the donor’s obligation to take a required minimum distribution from his/her IRA. However, it is important not to forget that the charity must nonetheless furnish contemporaneous written acknowledgement (CWA) with regard to the charitable gift. The failure to obtain a CWA could result in the donor being denied a charitable deduction, or not having the QCD qualify, thus causing the donor to recognize his/her required minimum distribution (RMD) in income for the year.
QCDs: Only those individuals over the age of 70 ½ are eligible to make a QCD, from their IRA, with the limit on the QCD for a year being $100,000. The QCD is normally accomplished by the IRA custodian delivering a check from the IRA directly to the publicly supported charity, excluding however donor advised funds or private foundations or supporting organizations.
CWA: To curb perceived abuses arising from the overstatement (or outright fabrication) of charitable gifts, Congress put in place strict laws that govern the reporting of charitable contributions. These rules cover both cash and non-cash charitable gifts. They include the obligation to report what was given, how much was given, the fair market value of the item given, the donor’s cost basis with regard to the item that is given, etc. The charity’s part of this heightened reporting is that it is required to provide a receipt for the charitable gift that represents that there was no benefit provided to the donor. Nor were any goods or services, other than an intangible religious benefit, received by the donor from the charity in exchange for the QCD. These restrictions are covered in the CWA, which is essentially serves as a receipt for the charitable gift, which applies to all charitable contributions in excess of $250.
Charitable Gift Reporting: When a QCD is implemented, the necessary documentation needed for the donor’s Form 1040 includes the amount of the charitable gift, the date of the donation, the name of the charity, and as indicated above, whether the charity provided any goods or services for the donation. Since a QCD is typically accomplished by the IRA custodian mailing a check directly to the charity, it is easy to verify the date of the gift, the amount of the gift, and to what charity the money was sent by the IRA custodian. More problematic is the need to obtain the proper receipt from the charity. Even if no goods or services were received by the donor, the CWA cannot remain silent on this topic. The CWA must affirmatively state that nothing was transferred back to the donor from the charity. Failing to mention that ‘no goods or services were received by the donor’ could cause the QCD to be disallowed, leading to taxable income to the donor.
Strict Interpretation: Recent Tax Court cases have demonstrated how harsh these gift substantiation and acknowledgment rules are interpreted by the courts. In one reported case. just published, the charity’s acknowledgment failed to include the magic language that ‘no goods or services were received.’ While it was absolutely clear that a charitable gift had been made by the donor to the charity, the Tax Court denied the donor’s claimed income tax charitable deduction based on the Tax Code’s requirement that the required language be included the charity’s receipt. Moreover, there was no retroactive ‘fix’ because the Tax Code requires that the CWA must be obtained by the donor on or before the earlier date on which the donor files his/her income tax return, or the due date (including -extensions) for filing their Form 1040. Thus, creating the necessary ‘paper-trail’ after the event is no help. The Tax Court noted that it was bound to enforce the Tax Code as it is written, and it placed the ultimate responsibility to obtain the needed CWA on the donor and not the charity. In short, the donor’s ‘substantial compliance’ with the Tax Code’s requirement was not available as a defense or excuse.
Conclusion: While a QCD seems to be a fairly simple way to accomplish charitable giving desires, is important to remember that there are still plenty of rules and restrictions that regulate that simple act of giving.
