The 2017 tax law resulted in some important changes to how deductions work for federal taxes.
Under the new tax law, many deductions have been eliminated or reduced, while at the same time the standard deduction was nearly doubled – to as much as $26,600 for a married couple filing jointly. As result, it is anticipated that 90% or more of taxpayers are expected to forgo itemizing their deductions and instead simply claim the standard deduction.
While the charitable deduction was left unchanged, your ability to claim the charitable contribution deduction may depend on whether you have enough other itemized deductions to exceed the new, larger standard deduction. If you don’t think you will, but you still want to continue your charitable giving, are there still tax-efficient strategies available?
In short, yes, subject to certain conditions.
In this post, we’ll discuss using qualified charitable distributions (or QCDs) as a tax-efficient strategy to support your charitable giving.
What is a QCD?
A qualified charitable distribution is a withdrawal from an individual retirement account that is sent directly to a charity.
Who can use a QCD?
You must be age 70½ or older at the time of the donation.
How is a QCD helpful?
After you reach age 70½, you are required to withdraw funds annually from your IRA and report the distributions as income on your tax return. These are so-called Required Minimum Distributions. So, if your RMD requires you to withdraw, say, $10,000 from your IRA in 2018, that will increase your income this year by $10,000.
Let’s say that you have charitable intent and would like to donate to five charities before year-end. You could instruct your IRA custodian to send $2,000 to each charity. Those donations will satisfy your $10,000 RMD for the year. Additionally, you won’t be required to include the $10,000 as income on your tax return, as you normally would.
The result of making the QCD is that your Adjusted Gross Income (or “AGI”), your taxable income, and your tax liability all end up being lower than they otherwise would be.
Do I have to send my entire RMD to charity to use a QCD?
No, you can distribute part of your RMD to charity using a QCD and take the remainder as a normal distribution.
If I’ve already taken my 2018 RMD, can I still use a QCD?
No, if you’ve already taken your full RMD for the year, you can’t use a QCD this year. That’s because the IRS considers the first dollars that are distributed from your IRA each year to be “deemed” as counting toward your RMD.
Is there a limit on the size of a QCD I can make?
Yes, you can contribute a maximum of $100,000 per year from your IRA(s) to one or more qualified charities. And the limit of $100,000 is per person, not per IRA(!).
Do QCDs have other benefits?
Yes. Recall that making a QCD keeps the donation amount out of your taxable income, which keeps it out of the “Adjusted Gross Income” calculation. And your AGI affects the amount of Medicare premiums you pay, the tax deductions you can take, and the tax you may pay on Social Security benefits.
Are there any other potential pitfalls or restrictions to consider?
There are a few more limitations to be aware of, in addition to those already covered. For one, you can’t both take a QCD and take an itemized deduction for your charitable gift. Also, your donation can’t be made from a 401(k) or 403(b) employer-sponsored retirement plan. Active SEP or Simple IRA plans also aren’t eligible to use for a QCD, but “inactive” plans are. Traditional or inherited IRAs are fine – though you must still be age 70 ½ if using an inherited IRA. A Roth IRA also qualifies, but since Roth distributions are generally tax-free, this isn’t an option to consider.
Before making any decision about distributions from retirement accounts and charitable giving, you should consult with your estate planning attorney, accountant or CPA, and/or financial advisor for guidance.
In a future post, we’ll review another tax-efficient strategy for charitable giving – namely, “bunching” your deductions.
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