by: Brad Cantrill, CFP ®, JD*
One of the fallouts of the new Tax Cuts and Jobs Act is that fewer people will be able to itemize their taxes. The caps or outright elimination of some tax write-offs often mean that the $26,600 standard deduction is the best option for a couple over 70 1/2. That’s fine for simplifying your tax return, but what about those who are charitably inclined? How does one effectively give to their favorite charity while maximizing potential tax benefits on their return? Fortunately, the tax code provides a way to give directly to charities and claim a benefit through a Qualified Charitable Distribution (QCD).
QCD’S are not new. They were first introduced in 2006 through the Pension Protection Act. The initial challenge was the temporary nature of the legislation. Congress often passed extenders to carry the bill from one year to the next, but the planning uncertainty around QCD’s made them difficult to utilize. This changed when the PATH Act of 2015 made QCD’S a permanent part of the tax code. Now anyone who is over 70 ½ can make a QCD of up to $100,000 through a direct contribution to a qualified charitable entity.
A QCD can have many benefits to IRA owners. First, it can satisfy the required minimum distribution requirements from the IRA. Second, a QCD will effectively add to a standard tax deduction and create additional tax savings for the IRA owner. This becomes more valuable with the Tax Cut and Jobs Act’s increased standard deduction rules.
QCD’s will lower adjusted gross income (AGI), which can help avoid “bracket bumps” into a higher tax bracket, or reduce social security taxes under the provisional income test. A lower AGI may also potentially increase medical deductions, lower Medicare premiums, or increase rental real estate losses.
It is important to pay attention to the rules when doing a QCD. First, it only makes sense if it’s coming from an IRA. Simplified Employee Pensions and Simple IRA’s are fine but refrain from using these in a Roth IRA. The transfer must be direct to the institution and no private grants are allowed. QCD’s are limited to $100,000 per person and any excess will be taxable. It’s also important to work with a qualified professional and let your tax preparer know about the QCD as the 1099-R lacks a designated reporting code.
So, if you have an IRA and are over 70 ½ consider using a QCD as part of your distribution strategy. There is potential for this to be a big win for all parties involved.