How The Qualified Charitable Distribution Can Help Older Taxpayers Benefit Without Itemizing Deductions
The Tax Cuts and Jobs Act (TCJA) has made itemizing deductions less attractive and, as a result, the number of taxpayers who itemize on their personal tax returns is estimated to decrease by at least 50 percent. But that doesn’t mean tax-savings opportunities no longer exist. It just means you have to get more creative.
By using the qualified charitable distribution (QCD), those who are 70 ½ or older no longer have to itemize their charitable deductions to receive a tax benefit. All they need is an IRA.
The QCD rule allows taxpayers to make IRA distributions directly to a qualified charity without treating those distributions as taxable income. In this way, the QCD amount is never counted as taxable income on your tax return and your adjusted gross income never increases.
How much a taxpayer can benefit from this tactic, depends on the individual taxpayer. Required Minimum Distribution amounts are calculated based on IRS tables. The percentage from the table varies with age and is applied against the taxpayer’s total IRA balance at the end of the preceding year.
QCDs are easy to execute, and there is no minimum amount. There is, however, a $100,000 limit per taxpayer, per year.
The Nuts & Bolts
Taxpayers must take their first required minimum distribution from their traditional IRAs in the year they turn 70 ½. However, the first payment can be delayed until April 1 of the year following the year they reach age 70½. Failure to take the required minimum deduction can lead to penalties equal to 50 percent of the excess of the amount that should have been withdrawn over the amount actually withdrawn. If the first distribution is postponed, two distributions will be required in the first distribution of year-one by April 1 and the other by Dec. 31.
QCDs can’t be claimed as a deduction on the taxpayer’s return and aren’t subject to the general percentage limitations that apply for making charitable contributions. However, QCDs are considered when determining one’s annual required minimum distribution. To be excluded from gross income, the distribution must be entirely deductible as a charitable contribution deduction without regard to the regular philanthropic deduction percentage limits.
Long story short, if you receive required minimum distributions from your IRA, direct your distributions to go directly to a charitable organization and have no plans to itemize your deductions, the QCD tactic can result in substantial tax savings.
The QCD Tactic In Action
Gene and Dawn Jones, both age 73, will have $110,000 of Adjusted Gross Income for 2018, which includes $40,000 worth of Required Minimum Distributions. They won’t be able to itemize deductions. Every year they give a $2,000 check to their church and another $1,000 to a local animal shelter. This year, if they make the same gifts, their taxable income will be $83,400 ($110,000 minus $26,600 standard deduction) and their federal income tax will be $10,227.
Using the QCD approach, Gene and Dawn will withdraw $37,000 from Gene’s IRAs and will have their donations go directly through as QCDs from those IRAs. Taking this approach will satisfy their charitable giving goals, meet Gene’s required minimum distribution requirement, and will reduce their taxable income to $80,400 ($107,000 minus $26,600 standard deduction). Now, their tax bill is $9,567, which is $660 less than doing things the normal way.
Where To Start
If you’re interested in using QCDs to reduce your tax liability, the first step is to defer taking your required monthly distribution (or your entire required monthly distribution amount) until you’ve had a chance to determine how much you will donate to charity for the year. By doing some proper tax planning, you will know how much of your required monthly distribution will be needed to properly reduce your adjusted gross income and taxable income to minimize their tax liability.
The tax savings doesn’t stop here. Qualified charitable distributions have a lot of great benefits. Contact Rea & Associates to learn more.
By Cindy Kula, CPA, PFS, CFP (Cleveland office)