“Qualified Charitable Distributions – A Tax Planning Advantage Over 70 1/2” by Diane Thacker, CPA | Manager – Tax
The “Tax Cuts and Jobs Act” that was passed in late December will impact the tax benefit of charitable donations for certain taxpayers. This article outlines a popular method for those over the age of 70 ½ to maintain the tax advantages of charitable contributions. Although the strategy has been available for years, the changes to itemized deduction rules in the new tax law increases its value for many taxpayers.
What has Changed in Qualified Charitable Distributions?
While the ability to deduct charitable contributions as itemized deductions has not changed under the new law, limitations on certain other itemized deductions (ex. state/local income and property taxes) and higher standard deduction levels will lead more taxpayers to choose the standard deduction option. Under that option, charitable donations will not reduce taxable income or tax liability. These taxpayers could benefit from Qualified Charitable Distributions (QCD).
How can QCDs Benefit me?
A QCD is a direct transfer of funds from your IRA custodian to a qualified charity. The IRS allows each qualifying taxpayer to contribute up to $100,000 per calendar year to one or more charities via IRA distributions, and the total will NOT be included in taxable income. The QCD can be counted towards satisfying all or part of the required minimum distribution (RMD) prescribed by tax law for taxpayers over the age of 70 ½, and giving more than the RMD amount is permissible up to the $100,000 limit.
For taxpayers who will begin to use the higher standard deduction, the advantages of this strategy are numerous. Because the QCD amount is not included in taxable income, the taxpayer indirectly still receives the benefit of the charitable contribution reducing his income. The taxpayer will also benefit from the QCD for Ohio income tax purposes as Ohio’s tax calculation is derived from federal adjusted gross income. The lower federal income resulting from using a QCD may also reduce the phaseout of several other tax benefits or additional taxes that result from higher adjusted gross income levels.
At first glance, the benefits and drawbacks of this strategy appear to offset for taxpayers who will still itemize. The QCD will not be included as part of income, but the QCD amount will also not be permitted as an itemized charitable deduction. However, as noted above, the taxpayer will still receive the other benefits of a reduced adjusted gross income.
QCDs are Not Appropriate in all Cases
It is important to note that the QCD must go directly from the IRA to the charity; taking a distribution in cash and then personally donating it to charity does not count. Some charities do not qualify to receive QCDs, including private foundations and donor-advised funds. A QCD can only be made from an otherwise taxable distribution; if a portion of your IRA was funded with nondeductible contributions, special rules apply. Finally, if your QCD amount is less than your RMD, you will still be required to withdraw and pay tax on the extra amount needed to satisfy your required minimum distribution.
Apple Growth Partners is here to help
Contact your tax advisor at Apple Growth Partners today to find out whether you would benefit from adding qualified charitable distributions to your IRA distribution strategy.
The information contained in this article is current through the published date and may change when regulations and other guidance are issued. Content has been vetted by Apple Growth Partners’ internal tax reform team of licensed CPAs. For more information about this content, or any other matters related to tax reform, please contact your Apple Growth Partners advisor.