Qualified Charitable Distributions (QCDs)—sometimes known as “Charitable IRA Rollovers”—were introduced in 2006 and made permanent in 2015. But they just got an unintended boost with the recently passed Tax Cuts and Jobs Act (TCJA).
With new caps on state/local/property taxes and mortgage interest, elimination of other deductions, and the standard deduction roughly doubled, more tax filers will be driven to skip Schedule A entirely and just claim the standard deduction. In fact, according to projections under the House tax plan (a bit different from final law), Americans itemizing their deductions would drop from about 26% of filers down to only 8% under tax reform.
But the Qualified Charitable Distribution strategy gives some folks a tax-favored opportunity to give to charity without the worry about not being able to deduct it.
Here are the new (2018) standard deduction amounts. If the total of your eligible deductions isn't larger than your standard amount below, then it may be better to do your charitable giving straight from your IRA (more below).
Source: What The 2018 Tax Brackets, Standard Deductions And More Look Like Under Tax Reform (Forbes, 12/17/2017)
Tax filers age 65+ can add $1,300 to their standard deduction ($1,600 if unmarried).
By way of background, Qualified Charitable Distribution requirements include:
- You must be 70 ½ or older and subject to Required Minimum Distributions (RMDs) from your IRA.
- The strategy is limited to IRAs, not 401(k)s or other such retirement plans.
- You can arrange for the contribution to be paid directly from the custodian of your IRA to a qualified charity you support.
- Such contributions can be applied toward—or possibly even fully satisfy—your Required Minimum Distribution (RMD).
- The maximum amount is $100,000 per taxpayer per tax year.
- You don’t get to claim a charitable deduction but—and this is the beautiful part—the amount you distribute to charity will not be treated as taxable income.
The Qualified Charitable Distribution strategy may help lower-income taxpayers keep under Provisional Income thresholds thereby reducing the taxability of their Social Security benefits. And it may help higher-income taxpayers keep their Adjusted Gross Income under certain thresholds that trigger, for example, higher Medicare Part B premiums.
And let’s not forget state income taxes. By definition, if you’re distributing from your IRA directly to charity and not to yourself, then that’s not taxable income. So the benefit is not just federal but also reduced state income taxes (if applicable). That said, state tax laws are independent of federal laws and change frequently, so be sure to double-check your state.
Practically speaking, directing your IRA custodian to make charitable contributions works best with fewer, larger gifts to your favored charity(ies). It's not really intended for the periodic $35 contribution to the Girl Scouts, for instance.
Perhaps you're like some of my clients who give $5,000, $10,000, or more every year to their church and/or other causes they believe in. Large gifts like that can go a long way toward satisfying your IRA’s Required Minimum Distribution.