Qualified Charitable Distributions Still Provide Tax Benefits Under the TCJA

LFL Veritas Blog: RMD Charitable Distribution

Qualified Charitable Distributions Still Provide Tax Benefits Under the TCJA

Under the Tax Cuts and Jobs Act (TCJA), standard deductions were doubled to $12,200 for single individuals and $24,400 for married couples. The TCJA also eliminated miscellaneous itemized deductions while restricting deductions for state and local income taxes and property taxes.

As a result, millions of Americans are choosing the larger standard deduction and no longer itemizing their deductions. This has created serious concerns in the nonprofit and philanthropic community about possibly sharp reductions in giving. They worry that people won’t give because the tax benefit essentially has been eliminated.

However, there is still a way for older taxpayers, who are responsible for the majority of charitable giving in the US, to realize significant tax savings by making a qualified charitable distribution (QCD) via required minimum distribution (RMD). First, let’s explain RMDs and QCDs before getting into the tax benefits.

What Is an RMD?

Each year, people age 70 ½ and older with a qualified IRA must take an RMD, the minimum amount that must be withdrawn from the account each year. Even if you don’t need or want the money, you have to take RMDs.

You also have the option to withdraw more than the minimum amount. In fact, you can withdraw every dollar in the first year. Just keep in mind that the withdrawals you take will be included in your taxable income.

There are some exceptions and IRA plans that allow you to defer RMDs, so you should check with your accountant to determine eligibility. For example, Roth IRAs aren’t subject to RMDs until after the owners dies.

It’s important to plan your RMDs carefully and confirm that you’re using the current calculation worksheet because these withdrawals could push you into a higher income tax bracket. They could also trigger phaseouts of other tax deductions, as well as higher taxes on Social Security income.

What Is a Qualified Charitable Distribution?

A QCD, also called an IRA charitable distribution or rollover, allows people age 70 ½ and older to give up to $100,000 (up to $200,000 for married couples) directly to eligible charities from a taxable IRA rather than taking an RMD. Money never passes through the hands of the account owner. It goes directly from the account custodian to the nonprofit.

Keep in mind that donor-advised fund sponsors, private foundations and supporting organizations aren’t eligible for QCDs even though they’re charities. Also, some charities don’t accept QCDs, so check eligibility before you make a donation.

QCDs under the New Tax Law

Although there is no longer an incentive to itemize deductions for charitable giving, QCDs have not been touched by the TCJA. Older taxpayers can still make substantial gifts to nonprofits and benefit from a tax perspective.

QCDs are win-wins for nonprofits and donors. Nonprofits can often secure larger gifts via QCDs than they would have if someone donated cash or other assets. That’s because donors aren’t writing checks from a bank account. Money that they haven’t seen in years, if at all, is directly transferred from an IRA to an eligible nonprofit. Donors might be more generous in this scenario.

From the donor’s perspective, they benefit from not increasing their taxable income or triggering the phaseouts mentioned previously. This is especially important if you don’t want or need the money. Donors would also reduce their IRA balance, which could then reduce future RMDs. At the same time, donors who are passionate about a charitable organization’s mission might be able to make a larger gift from an IRA.

If you want to learn more about how QCDs allow you to make larger donations to worthy causes without increasing your taxable income, speak with your accountant. Make sure the IRA is eligible, the nonprofit organization is eligible, and the distribution is handled properly.

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