Over the Age of 70 ½ and Making Donations? Take Advantage of QCD’s

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.

What is a QCD?

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:

• The taxpayer must be over the age 70 ½ at the time of the QCD
• The QCD must be made from a traditional or Roth IRA
• The QCD must be made directly from the IRA trustee to the qualified organization.
• The total amount that can be excluded from taxable income is $100,000 per year, per taxpayer.

Benefits of QCD’s

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.

Is a QCD Right for You?

Making a QCD is most beneficial to taxpayers who:

• Have paid off their home mortgage and no longer have mortgage interest expense;
• Have noncharitable itemized deductions less than their available standard deduction;
• Consistently give to charity each year; and
• Do not “bunch” their donations into particular tax years.

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.

• They have $110,000 of income, not including distributions from their IRA.
• Chris is age 75, and his RMD for the tax year is $30,000.
• They have $30,000 of itemized deductions between state income taxes and property taxes (Note: per the TCJA, only $10,000 is allowed as an itemized deduction).
• They plan to donate $30,000 to charity either by QCD or by cash.

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.

Conclusion

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.

For additional considerations, please reach out to Tony Kallevig, CPA, Senior Associate or contact our Tax Solutions Team at Mahoney to be of help to you in any way.