March 2018 Monthly Insight: Qualified Charitable Distributions

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Mar 6, 2018


“No one has ever become poor by giving.”
Anne Frank

The concept of a qualified charitable distribution (QCD) was first introduced in the Pension Protection Act of 2006.  A QCD allows an IRA owner over age 70½ to make a charitable contribution to a charity directly from the taxpayer’s IRA, without counting the distribution as taxable income.  In addition, the QCD also satisfies the owner’s Required Minimum Distribution (RMD) requirements.  As a reminder, RMDs must start when the IRA owner reaches 70½ and in most cases is fully taxable (non-Roth IRAs).

Most RMDs are taxable and increase the adjusted gross income (AGI) on a taxpayer’s yearly form. Therefore, every year that RMDs come out of an IRA, the taxpayer is subject to both income taxes and “stealth taxes” that are a function of high AGI.  “Stealth taxes” are additional taxes or costs that are based on income levels.  For example, a high AGI could increase the amounts of Social Security that might be subject to income tax or could increase Medicare insurance premiums through the income-related monthly adjusted amount (IRMAA).

You probably see where we’re going here. There is a clear and significant advantage to making a charitable contribution through a QCD, because the QCD amount does not increase your AGI.  Although the QCD comes out of your IRA and satisfies your annual RMD, you do not report the income on your income tax return, since it went directly to a charity.  Further, since the income is not picked up, there is also no need to report the charitable deduction.

Our last Monthly Insight talked about the latest tax bill, the Tax Cut and Jobs Act (TCJA), which removed the personal exemptions and doubled the standard deduction for taxpayers, beginning this year.  Now, with the higher standard deduction, fewer taxpayers will be itemizing and the QCD plays a much larger role in income tax planning, going forward.  In fact, every person who has a charitable intent and meets the QCD rules for age 70½ should make that contribution through a QCD.

Let’s look at a simple example.  Fred and Wilma, both over age 70½, expect to have social security, pension, and other taxable income totaling $80,000, not including this year’s RMD.  Typically they have made charitable contributions totaling around $15,000 every year.  Under the new TCJA standard deduction, they will get a standard deduction of $24,000, plus an additional $2,600 deduction because both are over age 65.  Since they are generally healthy, have no mortgage interest, and live in a low tax area, the $26,600 standard deduction is greater than their itemized deductions, even considering the charitable gift.

Fred and Wilma decide to satisfy their RMD requirement by sending the $15,000 RMD to their favorite charity by using a qualified charitable distribution.  They contact their financial advisor and instruct their IRA custodian to send a check directly to the charity, as required in the regulations for a QCD.

As we mention above, IRA owners over age 70½ should consider supporting their favorite charity, house of worship, etc. by using the QCD.  Over the current tax season, this would be an excellent topic for you to discuss with your tax advisor as you review your 2017 income tax return and plan for 2018.

Key points to keep in mind when making a qualified charitable distribution include the following:

  • The QCD applies to IRA owners or beneficiaries age 70½ and over and is capped at $100,000 per person, per year.
  • The charitable donation from an IRA will satisfy a required minimum distribution, but the IRA distribution is not includable in reported income.
  • For married couples where each spouse has their own IRA, each can contribute up to $100,000 from their own IRA.
  • The contribution to the charity would have had to be entirely deductible if it were not made from an IRA. There can be no benefit back to the taxpayer, including even small thank you gifts.
  • RMDs are deemed to be satisfied by the first distribution that comes out of the IRA for the year. If you wish to fully satisfy your RMD by a QCD, it needs to be the first distribution of the year from your IRA.  Even if you don’t take your RMDs until December, you can use the QCD then.

As always, we are thankful you have given us the opportunity to serve as your financial advisor. Nonetheless, please reach out to us if you have any questions or if you would like to discuss any other matters, especially if you are intrigued about using a QCD for your charitable contribution this year.  We would be happy to talk with you.