Most IRA owners know they are subject to required minimum distributions (RMDs) after age 70½. These RMDs are generally taxable income and continue for life. But this year, that taxable income has a good chance of being reduced or eliminated completely by using a qualified charitable distribution.
A Qualified Charitable Distribution (QCD) is a direct transfer of funds from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, as long as certain rules are met.
This year, QCDs are more valuable than ever before. So valuable in fact, that everyone who qualifies should be making their donations through QCDs, which allow you to make charitable gifts of up to $100,000 per year directly from your IRA. An IRA check made payable to the charity will also qualify.
QCDs are only available to IRA owners (and IRA beneficiaries) who are age 70½ or older. And not all gifts are eligible; gifts made through donor-advised funds don’t qualify and neither do gifts to private foundations. What’s more, gifts made to your children do not qualify. Even if you consider them a charity, the tax law does not.
Also keep in mind that you cannot receive any gift back in return for your gift, otherwise the QCD fails. Ask the charity not to wreck this tax benefit for you with gifts, show tickets or tote bags, regardless of their value. If the QCD fails, then you are simply back on the old system where you could claim an itemized deduction, assuming you have enough to itemize with the new high standard-deduction amounts.
1 . Once you make a gift with a QCD, the transfer from your IRA to the charity is excluded from your income, and the amount given goes toward satisfying your RMD for the year. That’s a pretty good deal. No tax on your RMD up to the QCD amount you’ve given. That keeps your income lower, and, in turn, reduces your tax bill.
2. The QCD allows you to “effectively” salvage those charitable deductions in addition to taking the new larger standard deduction, so you get both. I say “effectively” since there is still no actual deduction on the tax return if you don’t itemize. But excluding the IRA distribution from income is the same thing as gaining a tax deduction. In fact, it’s much better since the excluded amount given to the charity reduces your adjusted gross income (AGI). That is a key figure on the tax return. AGI determines the taxation of Social Security benefits, Medicare surcharges, other tax deductions, credit and benefits. An itemized deduction is not as valuable since that does not reduce AGI. It only reduced taxable income.
3. What if you have enough in other deductions to allow you to itemize? Even if you can itemize your deductions, you’ll still do better using the QCD because it reduces your AGI. In addition, the QCD can actually increase your medical deductions which are based on your AGI amount.
4. Some people may ask if it’s better to give appreciated stock and eliminate the capital gain. Generally that would be a good tax move, but not here. You still come out better with a QCD because QCDs are only available to those over age 70½. Those over that age might be better off not giving away appreciated stock, since at death the appreciation won’t be taxed anyway due to the step-up in basis that heirs will receive. That capital gain will never be taxed once the funds are inherited. That is not true with an IRA. By doing your gifting with a QCD, your family will inherit less of your taxable IRA and more tax-free appreciated property with the step-up in basis at death. Your family will end up with more and give less to IRS this way.
5. To give you an idea of the tax savings, look at your projected 2018 tax bracket. If you are in the new 24% tax bracket and make a $10,000 gift using the QCD, you’ll save $2,400 in tax as compared to making the same exact gift and not itemizing your deductions. And the $10,000 will count toward satisfying your RMD.
6. If you have already taken your RMD for 2018, that amount can no longer be offset with a QCD. You could still do the QCD if you want to withdraw more than your RMD, however, and those amounts will still be excluded from your income, up to the $100,000-per-year limit.