The 2017 tax law resulted in some important changes to how deductions work for federal taxes.<\/p>\n
Under the new tax law, many deductions have been eliminated or reduced, while at the same time the standard deduction was nearly doubled \u2013 to as much as $26,600 for a married couple filing jointly.\u00a0 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.<\/p>\n
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\u2019t think you will, but you still want to continue your charitable giving, are there still tax-efficient strategies available?<\/p>\n
In short, yes, subject to certain conditions.<\/p>\n
In this post, we\u2019ll discuss using qualified charitable distributions (or QCDs) as a tax-efficient strategy to support your charitable giving.<\/p>\n
What is a QCD?<\/strong> Who can use a QCD?<\/strong> How is a QCD helpful?<\/strong> Let\u2019s say that you have charitable intent and would like to donate to five charities before year-end.\u00a0 You could instruct your IRA custodian to send $2,000 to each charity.\u00a0 Those donations will satisfy your $10,000 RMD for the year. \u00a0Additionally, you won\u2019t be required to include the $10,000 as income on your tax return, as you normally would.<\/p>\n The result of making the QCD is that your Adjusted Gross Income (or \u201cAGI\u201d), your taxable income, and your tax liability all end up being lower than they otherwise would be.<\/p>\n Do I have to send my entire RMD to charity to use a QCD?<\/strong> If I\u2019ve already taken my 2018 RMD, can I still use a QCD?<\/strong> Is there a limit on the size of a QCD I can make?<\/strong> Do QCDs have other benefits?<\/strong> Are there any other potential pitfalls or restrictions to consider?<\/strong> 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.<\/p>\n In a future post, we\u2019ll review another tax-efficient strategy for charitable giving \u2013 namely, \u201cbunching\u201d your deductions.<\/p>\n
\nA qualified charitable distribution is a withdrawal from an individual retirement account that is sent directly to a charity.<\/p>\n
\nYou must be age 70\u00bd or older at the time of the donation.<\/p>\n
\nAfter you reach age 70\u00bd, 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.\u00a0 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.<\/p>\n
\nNo, you can distribute part of your RMD to charity using a QCD and take the remainder as a normal distribution.<\/p>\n
\nNo, if you\u2019ve already taken your full RMD for the year, you can\u2019t use a QCD this year.\u00a0 That\u2019s because the IRS considers the first dollars that are distributed from your IRA each year to be \u201cdeemed\u201d as counting toward your RMD.<\/p>\n
\nYes, you can contribute a maximum of $100,000 per year from your IRA(s) to one or more qualified charities.\u00a0 And the limit of $100,000 is per person, not per IRA(!).<\/p>\n
\nYes.\u00a0 Recall that making a QCD keeps the donation amount out of your taxable income, which keeps it out of the \u201cAdjusted Gross Income\u201d calculation.\u00a0 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.<\/p>\n
\nThere are a few more limitations to be aware of, in addition to those already covered.\u00a0 For one, you can\u2019t both take a QCD and take an itemized deduction for your charitable gift.\u00a0 Also, your donation can\u2019t be made from a 401(k) or 403(b) employer-sponsored retirement plan.\u00a0 Active SEP or Simple IRA plans also aren\u2019t eligible to use for a QCD, but \u201cinactive\u201d plans are.\u00a0 Traditional or inherited IRAs are fine \u2013 though you must still be age 70 \u00bd if using an inherited IRA.\u00a0 A Roth IRA also qualifies, but since Roth distributions are generally tax-free, this isn\u2019t an option to consider.<\/p>\n