By Jessica Mora, CFP®
Client Advisor Associate
This year saw one of the largest tax reforms in over three decades. Two of the major changes – an increase in standard deductions and reduced/eliminated itemized deductions – have taxpayers seeking new methods to reduce their tax bills. Although having been around for over a decade, Qualified Charitable Distributions (QCDs) have been reintroduced to the spotlight in 2018 as a strategy to reduce taxable income for retirees.
If you are an IRA owner over the age of 70½, have charitable intent, and have not yet taken your Required Minimum Distribution (RMD) for 2018, this is a tax saving strategy you may want to discuss with your financial advisor.
A QCD is a direct tax-free withdrawal from your IRA to the qualified charity (or charities) of your choice. Since the amount of your RMD, which would normally be considered taxable income, is sent directly to the charity and does not pass through your hands, it is not included in your taxable income for the year. The tax benefit is avoiding the income tax on the withdrawal and is in lieu of a charitable deduction on Schedule A.
This method could result in a considerable tax savings. For example, say you are in the 24% Federal tax bracket and are required to take a $10,000 RMD for the year. By taking advantage of a QCD, and avoiding the additional income, you would save $2,400 in taxes. This does not yet include state taxes, which could create an additional layer of savings. You have the option to designate only a portion of your RMD as a QCD, and that portion will not be included in your taxable income. You also have the option to give more than the amount of your RMD, up to $100,000, and the amount would be tax-free.
Especially since many taxpayers will now elect to take the standard deduction, as they may not have enough write offs to itemize their deductions (remember you get to take the greater of the two) they will not get a tax benefit for their charitable donations. This method can be used to provide an opportunity to still receive a tax break for your charitable donations.
Due to a few caveats, you should use the counsel of a tax professional or financial advisor to ensure your QCD is executed properly.
How We Can Help
We help our clients identify the causes that they are most passionate about. From there, we can introduce you to potential nonprofit partners in your field of interest, and through our planning process determine the most efficient way for you to do your giving. This may include distributions from retirement plans, using donor advised funds for the transfer of appreciated stock, or more sophisticated solutions through charitable gift annuities or charitable remainder trusts. Let us know if you would like some guidance on qualified charitable distributions.