If you’re taking Required Minimum Distributions from your IRA, and if you’re making donations to charity, then you can CUT YOUR INCOME TAXES FOR 2018!

Tax Break

This tax break is called a qualified charitable distribution (QCD).  Although QCDs have been around for a while, they have become more important due to 2017’s Tax Cuts and Jobs Act (TCJA).

Previously, a typical charitable gift was deductible from your income as an itemized deduction on Schedule A to your income tax return.  The TCJA increased the standard deduction and removed the utility of itemizing your deductions.  As a result, the TCJA reduces your ability to deduct your charitable contributions on your Form 1040 tax return.

 

Use your RMD for charity

This is where QCDs come to the rescue.  When you withdraw your annual Required Minimum Distribution (RMD) from your IRA account, the amount of the RMD is taxable income and increases the amount of your adjusted gross income.  A QCD is a payment from your RMD directly to the charity.  The beauty of the QCD is that the RMD that is used for the charitable gift is NOT INCLUDED in your adjusted gross income, and does not increase the amount of income taxes you owe.

Rather than losing the itemized deduction for your charitable contributions due to the TCJA, you can reach the same result by making a direct payment from your RMD to the charity.  Instead of your RMD increasing your taxable income, using your RMD (or a portion of it) to fund your charitable gifts will result in a dollar-for-dollar reduction in your income.  By using your RMD to make direct gifts to charity, you have essentially increased your standard deduction by the amount of your QCDs.

 

Some rules

Of course, like most aspects of the tax code, there are rules:

1. You must be 70-1/2 (or older) when you actually make the gift.
2. QCDs are not allowed from employer plans, like a 401(k) plan.
3. The charity receiving the QCD must be a 501(c)(3) organization.  Gifts to private foundations and donor advised funds do not qualify.
4. QCDs are capped at $100,000 per year.
5. There can be no benefit back to you, not even a CD or a coffee cup.
6. The QCD must be a direct transfer from the IRA custodian to the charity.  The IRA cannot cut a check to you, which you then cash and send to the charity.
7. Like your RMD, the QCD must be completed by December 31st.

 

An example

Let’s assume that you’re over 70-1/2.  The RMD from your IRA for 2018 is $10,000, and you use your RMD funds to make a $5,000 annual contribution to the Alzheimer’s Association in memory of your mother.  Let’s also assume that you’re in the 22% marginal income tax bracket, and that you do not itemize your deductions for 2018.

Normally, you would withdraw your RMD, pay the income tax on the RMD, and send a check for your charitable gift of $5,000.  At a 22% tax rate, the income tax attributable to the RMD would be $2,200.  After the payment of the taxes and the gift, you would have $2,800 left from the RMD ($10,000 – $2,200 – $5,000 = $2,800).

If you use a QCD and direct your IRA custodian to make a distribution of $5,000 to the Alzheimer’s Association, and withdraw the remaining RMD of $5,000, only the withdrawn RMD will be taxable income.  There will be no income tax on the RMD used for the charitable gift.  At a 22% tax rate, the income tax attributable to the withdrawn RMD would be $1,100.  After payment of the taxes, you would have $3,900 left from the RMD – a tax savings of $1,100!

 

It’s a No-Brainer!

It seems like everyone over 70-1/2 who is taking RMDs from an IRA and who is also making charitable gifts can benefit from (and save taxes) making QCDs to their favorite charities.  Check it out with your accountant before you take this year’s RMDs and make sure your QCD is reflected on your 2018 tax returns.

Questions?  Please call me at 312-372-1880.