Since the new Tax Cuts and Jobs Act has doubled the standard deduction starting in 2018, few individuals are expected to itemize. However, if you are an IRA owner over age 70 ½ and have a charitable intent, you can utilize Qualified Charitable Distributions (QCDs) to maximize the new higher standard deduction, in effect getting the standard deduction plus the charitable deduction.
Making a QCD as opposed to a normal charitable gift has two main advantages. First, a QCD counts toward satisfying an individual’s Required Minimum Distribution (RMD) for that year. Second, the distribution is excluded from the taxpayer’s income. It is this second benefit that really shines under the new tax bill.
The QCD only applies to IRA owners and beneficiaries who have already reached age 70 ½ or older. The donation must be directly transferred from the IRA to the charity and nothing can be received in return for the donation. Gifts to Donor Advised Funds or private foundations do not qualify. Total annual QCDs from all IRAs cannot exceed $100,000 per person, per year.
In addition, to the extent that the IRA owner had an RMD obligation for the year, the QCD is deemed to satisfy the RMD, even though the QCD is not taxable as an RMD otherwise would have been. One very important caveat of using a QCD to satisfy an RMD obligation is that an RMD is presumed to be satisfied by the first distribution that comes out of the IRA for the year. If you are considering this tactic, be sure to give to charity first!
The QCD is not included in the IRA owner’s gross income. Thus, the distribution does not increase gross income for purposes of determining such things as taxability of the IRA owner’s Social Security benefits and the IRA owner’s Medicare Part B premiums.
The IRA provider will report these as distributions to the owner from the IRA. The Form 1099-R it files with the IRS will have no mention of “QCDs” and no hint that the distributions are not taxable. It is up to the IRA owner on their personal tax return (Form 1040) to report the gross distribution and report the taxable portion as zero, writing “QCD” in the margin next to line 15b.
If you would like to hear more about this opportunity to benefit from this important tax saver, work with your financial advisor and tax professional.