As many taxpayers will soon find out, the rules under the recent tax reform laws may call for some to switch back to using the standard deduction (as opposed to itemizing qualifying deductions), which in some instances will prohibit those donating to charity from receiving the tax benefits they have otherwise been accustomed to.
To counter this, one tax planning tool we have been helping certain clients implement is the use of Qualified Charitable Distributions, also known as QCDs. A QCD may be worth looking into for charitably inclined IRA owners who are over the age of 70 ½ who otherwise must take a required minimum distribution (RMD) each year.
Simply stated, a QCD allows taxpayers claiming the standard deduction to still get a tax break for giving to charity, as QCDs are not included as income on Form 1040. As such, QCDs can be used to keep your adjusted gross income and taxable income within a desired range and, in certain cases, can help prevent income from reaching the phaseout range for itemized deductions.
Here are some additional details about QCDs to be aware of:
a. Per QCD rules, you can donate up to $100,000 per year, and you may make incremental donations across multiple charities, but you must be at least 70.5 years of age to be eligible
b. Unlike RMDs, a QCD cannot be made prior to the date you turn 70.5
c. QCDs can count toward your annual required minimum distribution (or RMD) as long as the QCD is made before satisfying the remainder of your RMD for the year
d. QCDs can only come out of traditional IRAs, they cannot come out of SEP or Simple IRA plans, and do not apply to Roth IRAs
e. If you have basis in a nondeductible traditional IRA, any QCDs you make are considered to come out of the taxable IRA funds first
f. QCDs must be made directly to eligible charities (approved by the IRS), and cannot be made through donor advised funds
g. QCDs cannot be distributed to you first, then donated. The funds must be paid directly to an eligible charity, and if your custodian issues a check, it must be made payable to the charity
h. Custodians will not code or report QCDs to the IRS, therefore it will be up to you to provide clear documentation of these transactions (note – custodians seem to handle QCDs a bit differently)
Lastly, the purpose of this information is to provide general information only and, as such, the content should not be relied upon as tax advice. If you would like additional information about QCDs and determine if they may be an appropriate tool for you to consider, be sure to consult with your CPA or tax preparer to understand if this tool may be an option to consider given your unique circumstances.