Article written by:
Rob Roll, CPA
Senior, Tax & Business Advisory Services
In the 10 or so months since the Tax Cuts and Jobs Act (TCJA) became law, most of the attention has been focused on the parts of the tax code that are new, such as the deduction for Qualified Business Income (Section 199A). Less attention has been paid to parts of tax law that have been around for a while but have gained increased relevance with the enactment of tax reform. One of these provisions is the Qualified Charitable Distribution (QCD) from IRAs.
Upon reaching age 70 ½, owners of traditional IRAs must generally take a required minimum distribution (RMD) from the IRA, which is included in their Adjusted Gross Income (AGI). However, a QCD allows a person to donate up to $100,000 to charity directly from their IRA to satisfy their RMD. If an account owner chooses to make a QCD, the distribution is not included in their AGI and they are not allowed to take a charitable deduction for the amount given to charity through a QCD.
The benefit of a QCD is to satisfy your RMD while not recognizing additional income, consequently keeping your AGI as low as possible. Certain tax deductions and credits are not available for taxpayers who have high AGIs. Also, certain excise taxes, such as the Net Investment Income Tax, only affect taxpayers whose AGI is over certain thresholds.
In addition to keeping your AGI low, QCDs ensure that you get a tax benefit from your charitable contributions. Under the TCJA, the standard deduction for married couples increased to $24,000 and the deduction for state and local taxes is now limited to $10,000. These two provisions will result in far fewer individuals itemizing their deductions. A taxpayer only gets the benefit of a charitable deduction if they itemize.
QCDs also allow you to maximize your giving. Normally, the deduction for charitable contributions is limited to 50% of your AGI. QCDs allows you to donate directly from your IRA, even if the amount is greater than 50% of your AGI.
Since QCDs can be used to satisfy your entire RMD or a percentage, they allow for flexibility. For example, if John Smith has a RMD of $10,000, he can donate $5,000 of it to his desired charity, while collecting the remaining $5,000 and recognizing that income. Or he can donate the entire $10,000 to fully satisfy his RMD.
In order for the donation to count as a QCD, it must satisfy the following criteria:
- The taxpayer must be 70 ½ years old.
- The distribution must transfer directly from the IRA to a charity with active 501(c)(3) status. The IRA account must be a Traditional or Inherited IRA account.
- The taxpayer must receive a confirmation letter from the charity. The letter must satisfy the applicable substantiation requirements, including a statement that no goods or services were received in exchange for the gift.
QCDs are a relatively little-known provision of tax law that will gain greater appeal in tax years impacted by the provisions of the TCJA. Please feel free to contact us if you have any questions regarding QCDs, or would like to learn how to incorporate them into your charitable giving strategy.