With a whirlwind of new tax legislation in the past few years, it is hard to keep up with the most current tax-savings strategies. A good tax-saving strategy, that just recently became more appealing due to new legislation, is to utilize a qualified charitable distribution.
In 2018, the Tax Cuts and Jobs Act (TCJA) doubled the standard deduction and limited state and local/property tax deductions to $10,000. This left many taxpayers unable to generate enough itemized deductions to surpass the standard deduction. As a result, for taxpayers who found themselves unable to itemize their deductions, charitable contributions no longer received the same tax benefit as before. Fortunately, there is still a way to reap tax benefits from charitable contributions: by utilizing a qualified charitable distribution (QCD). A QCD is a tax-free distribution from a taxpayer’s IRA made directly to a qualified charitable organization. The QCD can be a great strategy to save tax dollars, but, like all things good, there are restrictions and requirements:
Tax-Free Traditional IRA Distributions. As mentioned above, the main advantage of making a QCD is the tax-free treatment of distributions from a traditional IRA that would normally be taxable.
Required Minimum Distribution Satisfaction. When making a QCD after age 72 (the age when RMD’s are required to begin), the amount of the QCD is eligible to be counted as an RMD.
Tax-Free Roth IRA Distributions. Typically, making a QCD from a Roth IRA isn’t beneficial because normal distributions from a Roth IRA are tax-free. If, however, a taxpayer hasn’t possessed his or her Roth IRA for a minimum of 5 years, the distribution will be taxable. In this circumstance, making a QCD from the taxpayer’s Roth IRA would be beneficial because the proceeds from the QCD would not be taxable.
Making a QCD is most beneficial to taxpayers who:
Below is a common example of when making a QCD could be beneficial.
Example: Assume the following facts about Chris and Sandy, a generous couple married filing jointly.
Assume that Chris and Sandy have never heard of QCD’s. Chris simply receives his $30,000 RMD and then later, $30,000 in cash is donated to their favorite charity. The couple’s taxable income would be $100,000 (AGI of $140,000, minus itemized deductions of $40,000), resulting in a federal tax liability of $13,580.
Next, assume Chris and Sandy make the same $30,000 donation to charity, only this time, they do so using a QCD. Now their taxable income would be $85,200 (AGI of $110,000, minus their standard deduction of $24,800) and their federal tax liability would be $10,324. Making the QCD instead of donating cash saved Chris and Sandy $3,256 in tax.
In this new era, with state and local tax deductions being limited to $10,000 and the doubling of the standard deduction, the potential tax benefits of the QCD are more powerful than ever. To discover if making a QCD is right for your situation, you may want to reach out to a professional for assistance.