With the passage 100c of the Tax Cuts and Jobs Act of 2017, fewer taxpayers will be itemizing, opting instead for the higher standard deduction—now $24,000 for married filing jointly. What does that mean for individuals making charitable deductions? Their contributions may no longer provide a tax benefit.
Fortunately, the tax code provides a significant opportunity for taxpayers age 70½ or older who have non-Roth IRA accounts with an annual required minimum distribution (RMD). These RMDs are calculated each year, based on the total amount in the IRA and the taxpayer’s (and spouse’s, if applicable) ages. Having the IRA directly make a charitable contribution on the taxpayer’s behalf in the form of a Qualified Charitable Distribution (QCD), instead of the taxpayer writing a check from a personal account, benefits taxpayers of many income levels.
How does it work?
Taxpayers age 70½ or older direct their IRA trustee to make a distribution check directly payable to the charity. The charity then must provide an acknowledgment of the gift. Then on Form 1040, the taxpayer reports the full amount of any IRA distributions on line 15a, but then subtracts any QCDs to get to the taxable amount on line 15b. If all IRA distributions are given directly to charity, the taxpayer would report zero on line 15b.
Isn’t this the same as itemizing?
No, it is not. When a taxpayer itemizes, the entire amount of the IRA distribution is included in Adjusted Gross Income (AGI), and the charitable amount is then added to Schedule A, as part of itemized deductions. Those deductions are then subtracted to arrive at taxable income only if they exceed the standard deduction amount (in 2018, $26,200* for a couple in their 70s filing jointly). Including the IRA distributions in AGI can then affect the amount of Social Security income that is taxable, as well as raise the threshold needed to deduct medical expenses on Schedule A.
*$24,000 for married filing jointly plus $1,300 additional for each taxpayer age 65 or older.
A huge advantage of a QCD, especially in light of the increased standard deduction, is that even people who don’t itemize can take advantage of it, be it people who donate thousands of dollars, or hundreds of dollars. Including charitable donations on Schedule A often does not benefit a taxpayer because itemized deductions may not exceed the standard deduction, especially once mortgages are paid off later in life and portions of the taxpayer’s retirement income is not taxable at the state level. For those whose retirement income is taxed at the state level, using a QCD may also lower state taxes, as using a QCD will directly reduce AGI.
What to do next
Specific rules must be followed to allow for this preferred treatment, which include not exceeding the annual limit of $100,000 per taxpayer (and each taxpayer may use only his or her account to make the QCD). Gifts must be made from an individual IRA, which includes rollover IRAs, but not from a SEP or SIMPLE IRA. Qualifying charitable gifts may be made only to public charities—private foundations, donor advised funds and split interest charitable trusts are ineligible. Donations must be made directly to the charity. Finally, the taxpayer must be at least 70½ on the date of the gift, not just in the tax year in which the donation is made.
To determine if this is something that would benefit you, contact your tax advisor for more guidance on how to get the most benefit from your RMD.