With the passage of the 2017 Tax Cuts and Jobs Act (TCJA), there are changes that impact charitable giving. More specifically, individual donors and nonprofits can leverage TCJA to make smarter philanthropic contributions with the Qualified Charitable Distribution (QCD).
The Qualified Charitable Distribution and the Impact of the 2017 Tax Law
A QCD is a direct transfer of funds from an IRA of a donor aged 70½ or older to a qualified charity. The QCD allows multiple distributions from the same account for the same year, and they will help satisfy the required minimum distribution (RMD) for the year as long as you comply with specific administrative rules. Because of the direct transfer to charity, the QCD from an IRA is excluded from the donor’s taxable income. The distributions must be less than $100,000 for the year. Keeping your taxable income lower by making a QCD may reduce the taxation on social security benefits and may prevent tax bracket creep to higher Part B and Part D Medicare taxes.
The impact of TCJA will increase the use of the QCD by charitable donors. There is an almost doubling of the standard deduction to $24,000 per year, and for seniors both over age 65, the new standard deduction is now $26,500 per couple. With such a significant increase in the standard deduction, many donors will lose the tax-saving incentive of charitable deductions. Hence, donors will now take advantage of the higher standard deduction. For donors required to take the RMD who do not need the distribution for income, it thus makes financial sense to make QCDs from an IRA.
Benefits of the QCD for Charitable DonorsFor donors, there are two main benefits to using the QCD. First off, the distribution counts toward satisfying the RMD for the year. Secondly, the distribution does not count as income and therefore is not taxed. Depending on your own individual financial situation, the potential benefits of the QCD include:
- Save on federal, state, and local income taxes
- Enable giving more to charity
- Satisfy your IRA required minimum distribution
- Avoid the net investment surcharge
- Avoid excess Medicare Part B & D charges
- Reduce income taxes on your Social Security
How Charitable Donors Can Leverage the QCD for Smart Giving
If you are a charitably inclined individual donor aged 70½ or older and have an IRA with a required minimum distribution, you may want to:
Assess whether you need your IRA distribution for monthly support. If you take your IRA distribution as income to support your lifestyle, then a QCD may not be suitable. On the other hand, if you maintain your lifestyle without depending on the IRA distribution and set aside your IRA RMD after-tax proceeds and are not using these funds for lifestyle support, a QCD may work well for you.
Calculate the tax impact of a regular IRA distribution vs. a QCD from your IRA. Take into account the impact of ALL the taxes that may be incurred with the higher income. These include federal and state income taxes, Social Security, additional charges on Medicare Part B and Part D, net investment, and other possible taxes. Consult your tax professional to see how much a QCD may save you on your taxes.
If you determine that the QCD makes sense for part or all of your IRA distribution, you may want to find out if your current IRA custodian makes it easy to make a QCD. For example, one major discount brokerage firm offers free restricted charitable check writing on IRA accounts. This makes it easy for the IRA owner to simply write a check to the charities of your choice.
If charitable check writing from your IRA account is not available, contact your advisor/custodian to explore the administrative process for making QCDs. Check and clarify what costs, if any, are involved.
Of course, it is always important to check with your tax professional to receive guidance on how you can best incorporate tax-smart charitable giving decisions in your overall tax planning.
Gregory W. Doepke, CAP®, CFP® is an independent investment advisory representative with ACG Advisory Services, Inc. He is the owner and principal of Doepke Financial Advisory, LLC, a Virginia limited liability company that provides comprehensive wealth management, investment advisory and qualified plan consulting services for ACG Advisory Services and Actuarial Consulting Group, Inc.