The new tax law impacts several areas of your finances, however, one of the lesser discussed changes is how the new law impacts charitable giving. With the recent 2018 tax law changes, Qualified Charitable Distributions (QCDs) may make sense for those utilizing the standard deduction method.

So, what is a QCD exactly? It is an otherwise taxable distribution from a Traditional IRA, owned by an individual who is 70 ½ or over, which is paid directly from the IRA to a qualified charity. If done correctly, it is not taxable.

The ability to give directly to a qualified charity and avoid reporting the associated income on the tax return is a valuable advantage: QCDs allow you a tax advantage without itemizing on your return. The QCD saves income tax because the amount of the contribution is not shown as a taxable distribution.

In addition, the charitable distribution can satisfy “all” or “part of” the Required Minimum Distribution (RMD) needed to be taken from the IRA. For example, if your RMD was $20,000 and you made an $8,000 qualified charitable distribution for 2018, you would only have to withdraw another $12,000 to satisfy your 2018 required minimum distribution.

The 2018 tax law changes have nearly doubled the standard deduction to $12,000 for single filers (from $6,350 in 2017) and $24,000 for married filing jointly (from $12,700 in 2017). As a result, fewer people will benefit from itemizing. For individuals who are philanthropic and charitably-minded, QCDs may be a strong consideration – especially for those who are now utilizing the standard deduction and are no longer itemizing.

This chart compares the tax savings for a taxpayer – age 70 ½, filing “standard deduction,” with a marginal tax rate of 24% – utilizing a QCD as an after-tax donation versus not utilizing a QCD.

After Tax Donation QCD Donation
Charitable Contribution 8,000 8,000
Marginal Tax Rate 24% 24%
Tax Savings 0 1,920

Here are some additional benefits and features of qualified charitable distributions:

  • A QCD will count toward satisfying RMDs.
  • You MUST be age 70 ½ or older on the date of the distribution.
  • QCDs are federally tax free and are limited to the amount that would otherwise be taxed as ordinary income. (State rules may vary.)
  • The maximum annual exclusion per individual is $100,000.
  • The distribution must be paid directly to the qualified charity by the custodian. If you have the check issued to you directly, this will prevent your ability to claim the payment as a QCD.
  • The charity must qualify as a 501(C)(3) organization and be eligible to receive tax-deductible contributions.

Another benefit of the QCD worth mentioning is that it aids in reducing your Adjusted Gross Income (AGI). This is important as your AGI determines how much of your Social Security is subject to income taxes and the amount of your Medicare premiums. Thus, lowering your income can indirectly reduce other costs.

Finally, you should consult your tax advisor to ensure the QCD is properly noted on your 1040 form. If you do not let your tax preparer know, they will likely report the transaction as fully taxable.

“We’re committed to educating clients about how any changes or new legislation could impact their finances,” said Robert Katch, Manchester Financial President.

“We want our clients to know not only how the new tax law impacts them, but also empower them to make smart financial decisions,” said Alan Hopkins, Manchester Financial Chief Economic Strategist.

 

Laura Navarro, CFP®, is a Senior Financial Planner with Manchester Financial, a Westlake Village based Registered Investment Adviser serving families in Southern California since 1990. Manchester’s trademarked “Powered by Planning” process helps clients move forward with financial confidence.
This material is provided for general and educational purposes only, and is not legal, tax or investment advice. For each strategy or option mentioned, there are detailed tax rules that must be followed.