Thursday, January 2, 2020

Qualified Charitable Distributions

According to articles published earlier this year, charitable giving by individuals decreased in 2018.  While several factors can contribute to this, certainly one aspect that has always made charitable giving appealing is receiving a tax deduction.  However, because of the recent Tax Cuts and Jobs Act (TCJA), this is not as great of a factor as it once was.  Part of the TCJA changes was the doubling of the standard deduction.  When an individual files their personal return, they can deduct the greater of the standard deduction (a flat dollar amount) or the total of their itemized deductions, which includes charitable contributions.  For 2018, the standard deduction for a married filing joint return was $24,000 ($12,000 for single).  For many taxpayers, this was a high threshold to exceed, especially with the state and local tax deduction being capped at $10,000.

However, there is a part of the tax code that allows individuals 70 ½ and older to still get the benefit of a charitable deduction, while also claiming the standard deduction.  This benefit is achieved by making a Qualified Charitable Distribution (QCD).  Once individuals reach age 70 ½, they are required to begin taking required minimum distributions (RMD) from their traditional IRA accounts.  If an individual does not need these funds to finance their retirement, they can request their IRA trustee to make a direct payment to a qualified charity.  The amount that would normally be taxable, if the individual received the distribution, would now be converted to a nontaxable distribution.  The distribution still satisfies the RMD requirement but does not count towards the taxpayers adjusted gross income (AGI).

By not counting the distribution towards AGI, the taxpayer can potentially realize additional tax savings, aside from the immediate 100% above the line deduction of the distribution, such as:

·       Lower state taxes, as most states begin their tax calculations using Federal AGI
·       Reduced taxable social security benefits
·       Lower potential of being subject to AGI phase out of $25,000 rental real estate exemption
·       Less chance of being subject to phase out of certain tax credits
·       Lower AGI can reduce a high-income beneficiary’s obligation to pay a greater monthly Medicare premium

There are several rules to be aware of in order to benefit from this tax savings opportunity.  First, the benefit cannot be used for distributions from SEP, SIMPLE, or qualified retirement plan accounts.  Second, no more than $100,000 can be donated per taxpayer each year.  For married couples, each spouse can make a separate $100,000 charitable distribution per year.   Finally, if the donor received any benefit from the charity for the donation, then the entire distribution will be considered taxable.   

If you have questions, call us at (219) 769-3616 or email them to