Many of us give to charities both out of a sense of helping and also because it can be a great tax strategy. As we approach the end of the year, we’re sharing this information for folks that are working on their tax strategy for 2018. We’ve mentioned the effects of using donating a portion of the RMD in the past and it bears repeating.
Typically, individuals give cash or securities directly to their charities of choice, which results in an itemized deduction reported on Schedule A of their personal tax returns.
With tax law changes, specifically an increase in the standard deduction to $24,000 for a married couple filing jointly, in some cases, these types of itemized deductions have had their tax benefits lessened or even eliminated completely.
An alternative to the traditional methods of charitable giving for those who are 70 ½ or older is a qualified charitable distribution, or QCD. A QCD is a distribution from an IRA made directly to a qualified charitable entity. The total allowable distribution is limited to $100,000 per year per taxpayer ($200,000 for a married couple if both have IRAs). This tax saving strategy has been around for a while but was recently made a permanent part of the tax code. It’s important to note that a QCD can be used to satisfy the required minimum distribution (RMD) from an IRA if an individual is over age 70 ½ .
The tax treatment of a QCD differs from the traditional method of giving because a QCD is reported as an above-the-line deduction. Simply put, the amount of a gift directly from an IRA to a charitable organization can reduce the donor’s adjusted gross income (AGI). This treatment is important because a QCD may give greater tax benefits than giving cash or securities, which are reported as an itemized charitable deduction on Schedule A.
Note that this tax savings strategy may become even more powerful if the AGI reduction moves you, the donor, into a lower tax bracket, reduces your state income taxes, or reduces your net investment taxes due. The higher their charitable donations, the greater potential for tax benefits which may magnify the total tax savings.
Another potential positive effect of a QCD is that by reducing adjusted gross income, it may also reduce the donor’s Medicare costs. In 2018, differences in AGI (from two years ago) may reduce Part B monthly premiums as much as $294.60 and Part D costs can vary as much as $74.80 per month.
You (the donor) will need to take certain steps for a qualified charitable distribution and to report it when filing your tax return. First, a QCD must be paid directly to a qualifying charity. The distribution cannot come to the individual first, but instead must be distributed directly from the IRA account to the charity. The QCD must be made by Dec. 31 to count for the current tax year (just like a required minimum distribution).
Once you decide to utilize a QCD, it’s advisable to coordinate with the charity and the custodian of your IRA to ensure the correct steps are followed for the distribution to qualify by going directly from the donor’s IRA account to the organization.
Projecting all the tax effects with and without a qualified charitable distribution is essential to deciding whether or not to implement this strategy. Please consult your tax advisor.
Since this strategy has both financial planning and multiple tax implications, it is best used after fully evaluating all the options for meeting the your charitable giving intentions in the context of your situation and consulting with your tax advisor.
If you’re interested in making a year end donation please feel free to visit our donation page or reach out to me.