Qualified Charitable Distribution

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Potential Tax Savings for Seniors Under the New Tax Act with an IRA Qualified Charitable Distribution

Qualified Charitable Distributions by David Reyes

David Reyes, CPA – Maloney+Novotny

The 2017 Tax Cuts and Jobs Act (TCJA) made it much more unlikely that taxpayers would itemize their tax deductions on their personal tax returns. In fact, prior to the TCJA, it was estimated that 30% of taxpayers itemized deductions on Schedule A.  But due to the increase in the standard deduction for 2018, the number of taxpayers itemizing is estimated to be only 8-9%.  Beginning in 2018, the threshold to itemize deductions has increased for single filers from $6,350 to $12,000, and for joint filers from $12,700 to $24,000.  What this means is that if your itemized deductions do not exceed the standard deduction threshold, you get to deduct the standard deduction.

For charitably inclined seniors, there is still an opportunity to obtain tax savings for charitable contributions even though they are using the standard deduction.  Individuals who are age 70 ½ or older are required to take required minimum distributions (RMD) from their IRA’s each year.  These distributions are generally subject to income tax.  However, if an individual makes a Qualified Charitable Distribution (QCD) rather than receiving their RMD, they effectively get a tax deduction because the QCD is not included as income.  A QCD is a direct transfer from an IRA to a qualified charitable organization.  Since the distribution goes directly to a charity, the distribution is not included in income and because it’s not in the taxpayer’s income it effectively becomes a deduction from income.

Know the basics

The basics of a QCD are as follows: The distribution is made directly to a qualified charity on or after the individual has reached age 70 ½.  Up to $100,000 per year can be donated to a charity and be excluded from income. The QCD counts toward the individual’s annual RMD requirement. Here’s an example of how a Qualified Charitable Distribution would save taxes:

Donald and Hillary are husband and wife, both age 73. Their Adjusted Gross Income for 2018 is $120,000 which includes RMD’s totaling $50,000. Their total itemized deductions, including $10,000 of charitable donations is $22,000. Consequently, they will not be able to itemize deductions because their standard deduction is $24,000.  Thus, their taxable income will be $96,000 and their tax is $12,994. Using the Qualified Charitable Distribution strategy and gifting a charity $10,000 from their IRA will reduce their taxable income from $96,000 to $86,000, and their taxes owed down to $10,794. The result is a tax savings of $2,200 because they were able to make their charitable donation directly from the IRA instead of using personal funds.  If you have questions about making a QCD or IRA’s in general, contact Dave Reyes at dreyes@maloneynovotny.com or at 216-344-5233 or use this online contact form.