QCD: A Tax-Savvy Strategy That May Help Manage IRA Distributions

May 22, 2018

QCD

We just had our Strategic Advisor Conference at the Gaylord National Resort outside of Washington, D.C. I conducted a breakout session titled, “What your clients need to know about the new tax law” with the gracious help from two of our advisor clients. We discussed a few charitable planning ideas since taxpayers may lose the ability to itemize tax deductions starting in the 2018 tax year due to:

  • The increase in the standard deduction
  • The limitation on state and local taxes
  • Many miscellaneous itemized deductions that are no longer allowed

Itemizing isn’t what it used to be

Effective 2018, a married couple must hurdle the standard deduction of $24,000, before they can itemize their tax deductions. According to the White House Council of Economic Advisers, many will fall short. The number of Americans foregoing the standard deduction to claim itemized deductions is estimated to fall from just over 26% in the 2017 tax year to less than 8% under tax reform.

So, what do your clients need to know? One charitable idea that was discussed at the meeting is the qualified charitable distribution (QCD).

A QCD is a way of transferring IRA assets to a charity. The transfer is not taxable to the account owner and a charitable deduction cannot be taken.

QCD basics

The following are the basic rules, features and benefits for a QCD:

  • You must be at least 70½ at the time of the transfer. This applies to both IRA owners and Inherited IRA owners.
  • You can transfer up to $100,000 per person, per year. Married couples must each transfer from their own accounts.
  • QCDs can potentially help the tax situation by not raising income above thresholds that could trigger higher marginal tax rates, the taxability of Social Security benefits, the means test on monthly Medicare Part B premiums, the 3.8% surtax on investment income, and AGI limitations on deductions, such as medical expenses (a 7.5% threshold).
  • QCDs may be made by making a direct transfer from the IRA to the qualifying charity, or the IRA may mail a check made payable to the qualifying charity directly to the IRA owner, who then delivers the check to the charity. Using this latter approach, if the check is made payable to the IRA owner who then writes a check to the charity, the transfer doesn’t qualify as a QCD and would be treated as a taxable distribution.
  • Grant-making foundations, donor-advised funds and charitable gift annuities generally don’t qualify for this purpose.
  • It doesn’t apply to employer plans and only applies to pretax amounts in IRAs, Roth IRAs, and inactive SEP and SIMPLE IRAs.
  • The QCD can be used to satisfy a required minimum distribution for the year.
  • Individuals who claim the standard deduction can benefit from the full charitable contribution even though they don’t itemize.
  • The full amount of a QCD can be excluded from income even when the charitable contribution exceeds the 50%/30% adjusted gross income (AGI) limitation on charitable contributions.
  • Financial institutions are not obligated to withhold income taxes from a QCD.
  • Charitable substantiation requirements apply.1
QCD: A tax-savvy strategy that may help manage IRA distributions Click To Tweet

An example of QCD

Mr. and Mrs. Anderson, who are 72 and 69 respectively, have the following 2018 projected itemized deductions.

State and Local Tax: $10,000 (limited)

Mortgage Interest: $0

Gifts to Charity: $12,000

Total Deductions: $22,000 (Which is less than the standard deduction of $24,000, so the Andersons will not itemize.)

Mr. Anderson has a 2018 RMD requirement of $22,000, which he takes monthly and has received $10,000 to date. The Anderson’s are in the 24% federal tax bracket.

Mr. Anderson could have his remaining RMDs sent directly to his favorite charity ($12,000). By doing so, the Andersons can now exclude $12,000 of income from their tax return, which may save them $12,000 * 24% = $2,880. Since the Andersons were not going to itemize, the QCD makes great tax sense.

As you discuss the impact of the new tax law with clients over the age of 70½ about their charitable giving options, keep QCDs in mind—they’re constructive and offer the opportunity to engage in tax planning.

Investing involves risk, including possible loss of principal.

Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

1Substantiation of Contributions Per IRS Pub 1771: A donor can deduct a charitable contribution of $250 or more only if the donor has a written acknowledgment from the charitable organization. 

The donor must get the acknowledgement by the earlier of the date the donor files the original return for the year the contribution is made, or the due date, including extensions, for filing the return.

The donor is responsible for requesting and obtaining the written acknowledgement from the donee.

A donor cannot claim a deduction for any contribution of cash, a check or other monetary gift made on or after January 1, 2007, unless the donor maintains a written record of the contribution. 

 

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