Tax Reform for Individuals: Qualified Charitable Distributions
The tax benefits of donating to your favorite charity have changed under the Tax Cuts and Jobs Act (TCJA), but there are ways to offset the changes for individuals 70 ½ or older with individual retirement accounts (IRAs). With more taxpayers now utilizing the higher standard deduction, Qualified Charitable Distributions (QCDs) present a new opportunity for taxpayers to maximize the tax benefits of charitable giving.
What are the benefits of Qualified Charitable Distributions?
To retain the tax advantages of charitable giving, many taxpayers are considering making QCDs from their IRA. A QCD is:
- An otherwise taxable distribution from an IRA
- Owned by an individual who is age 70 ½ or over
- Paid directly from the IRA to a qualified 501(c)(3) organization
This is a great opportunity because QCDs are not considered taxable income to the account holder and they help satisfy the annual required minimum distribution (RMD). QCDs are not deductible as itemized deductions on the taxpayer’s individual income tax return, but because they don’t increase taxable income QCDs essentially provide a tax deduction and still allow taxpayers to benefit from the new, higher standard deduction.
Who is eligible for a Qualified Charitable Distribution?
IRA owners and beneficiaries are eligible to make a QCD, so long as the distribution is made on or after the date the taxpayer reaches age 70 ½. Simply making a distribution in the year the taxpayer turns 70 ½ is not sufficient. Distributions can be made from traditional, or SEP and SIMPLE IRAs that are not ongoing. An ongoing SEP and SIMPLE IRA are ones with active employer contributions in the year in which the charitable contributions are made.
How can I make a Qualified Charitable Distribution?
To make a QCD, instruct the trustee of your IRA to make a direct contribution to an eligible 501(c)(3) organization. It is important to insist the check is made payable to the charity directly and is not first payable to the owner or beneficiary of the IRA. If the check is first made to the taxpayer and then passed onto the charity, the requirements for a QCD are not met. Ensure that adequate records of the contribution are received to support the QCD.
QCDs may exceed a taxpayer’s RMD amount, so long as they do not exceed the $100,000 annual limit for single taxpayers. If married filing jointly, spouses can also elect to make a QCD of an additional $100,000 from his/her IRA.
On December 7, 2018, Steve, age 72, advised the trustee of his IRA to donate his $10,000 RMD directly to a qualified 501(c)(3) organization. Because Steve was 70 ½ at the time of the distribution and he directly contributed funds from his IRA to a qualified organization, the $10,000 is a QCD and is not included in his taxable income. Steve and his spouse file a joint tax return and their 2018 itemized deductions consist of $8,000 of state tax payments, so they will not itemize their deductions in 2018.
If Steve would have withdrawn $10,000 from his IRA and written a $10,000 personal check to the same charitable organization, he would have been required to pay income tax on the IRA distribution and, because his increased charitable deductions of $18,000 would still not have exceeded the $24,000 standard deduction, he wouldn’t have received tax benefit from the contribution. By choosing to utilize the QCD rules, Steve saved tax at his marginal federal rates on the $10,000 IRA distribution, satisfied his RMD requirement and still benefitted from the increased standard deduction. For a taxpayer in the 22% federal tax bracket, this represents $2,200 of federal tax savings.
Every taxpayer’s situation is different, so please contact an Anders advisor to determine if making a QCD is the right choice for you. Learn more about charitable contribution deduction changes under tax reform, or visit our Tax Reform Resource Center for videos, blog posts and resources on how tax reform will impact you, your family and your business.