Tax Strategy: Qualified Charitable Distributions

Almost everyone 70 ½ years of age or older must take (almost always) taxable required minimum distributions (RMDs) from traditional or inherited individual retirement accounts (IRAs). Individuals may distribute up to $100,000 tax-free from their IRAs to certain charitable organizations. These distributions are called qualified charitable distributions (QCDs). QCDs count as RMDs. QCDs have always been a good tax reduction plan for several reasons. They get even better in 2018.

Starting in 2018, the Tax Cuts and Jobs Act of 2017 (The Act) almost doubles the standard deduction. For example, a married couple, both 65 years of age or older, have a standard deduction of $26,600 in 2018. The standard deduction is indexed for inflation.

The Act limits itemized deductions. Notably, it suspends from 2018 through 2025 the deduction for miscellaneous itemized deductions and limits state and local tax deductions to $10,000 per year.

Let’s use an example. Assume that a retired couple, both over 70 ½ years of age, has paid off their mortgage, does not have substantial medical expenses and has RMDs of $30,000 or more in 2018. Assume that in 2018 their property taxes exceed the $10,000 deduction ceiling. Further assume that they make $30,000 of charitable contributions directly to their church and other public charities. So, they have $40,000 of itemized deductions on their tax return. This is our base case. (Note that the overall itemized deduction phase-down or “Pease Limitation” has been suspended through 2025. That’s a good thing.)

If our couple directs $30,000 of QCDs to be paid directly by the IRA custodian to the church and charities, they will reduce their adjusted gross income by $30,000 and be able to claim the standard deduction of $26,600. The QCD strategy reduces their taxable income by at least $16,600 ((30,000 +26,600) – 40,000) versus the base case. Assuming a reduction of income subject to the top marginal income tax rate of 37% (the top rate in 2018), the couple saves over $6,000 by authorizing QCDs from their IRAs.

Simple savings. There are some rules, but they are not burdensome. If you want to institute a QCD strategy, please contact your HM&M tax adviser for more information.