The passage of the Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction for taxpayers and placed a cap on itemizing state and local taxes at $10,000 per taxable year. For many Americans, this reduced the benefit of itemizing deductions on their tax returns and eliminated the tax benefit of qualified charitable contributions.

As we discussed in a previous post, Charitable Giving in Retirement, individuals are inclined to continue their charitable giving throughout their retirement years. While the tax benefit is not the primary motivation for giving, this new tax law may make it less financially advantageous for retirees to continue making their charitable donations, unless they consider making Qualified Charitable Distributions (QCD) from their IRA.

To illustrate how a QCD may work for your clients, consider Jim and Judy, ages 72 and 71. In 2018, they had an adjusted gross income of $110,000, of which $25,000 was the aggregate of their respective RMDs from their IRAs. They expect to utilize the standard deduction, but still wish to make their usual charitable donations of $10,000.

Making the $10,000 gift to their favorite charity will not provide any tax benefit in 2019 since they will be using the standard deduction. However, making the donation via a QCD offers two key benefits:

1. The QCD will count toward meeting their RMD requirement; and
2. The taxable income an IRA distribution otherwise represents will be excluded from reportable income, thereby reducing the income on which they will owe taxes.

There are a number of requirements associated with a QCD, including:

• They may not exceed $100,000 in any given tax year
• A QCD may be made from any type of IRA, except for Simplified Employee Pension (SEP) or a SIMPLE retirement account in which the employer is still making contributions
• The distribution must be made directly by the IRA custodian to a qualified charity or donor-advised fund
• A payment cannot be made prior to the IRA owner attaining the age of 70½
• A QCD may not be taken as a deduction by the taxpayer

Final Thoughts

The lower AGI arising from making a QCD may also have the benefit of reducing Social Security taxation, and lowering Medicare Part B and prescription drug coverage premiums.

There is no carryover provision for any unused portion in any given year, so you should counsel your clients to speak with their tax advisors to determine if this strategy makes sense for them.

See referenced disclosure (2) (3) (4) at https://blog-dev.americanportfolios.com/disclosures/