A boon for most taxpayers was the increase in the standardized deduction starting in 2018. Prior to the Tax Cuts & Jobs Act, a full 30% of households itemized deductions; since the change, a mere 10% do. This year, single people can deduct $12,950.00 and married couples filing jointly enjoy a deduction of $25,900.00. Leading up to and after the legislation was signed into law, there was a great deal of posturing from “experts” that charitable giving (formerly an itemization category) would fall off the cliff. The dust hasn’t completely settled yet, but data thus far shows that really hasn’t been the case. A great tool for seniors with retirement accounts to both decrease taxable income and indulge their wishes to support non-profits that are near and dear to their hearts is the Qualified Charitable Distribution or QCD for short.
Any taxpayer 70-1/2 and over who has a tax-deferred retirement account is eligible to take advantage of a QCD. An extra bonus occurs when taxpayers are 72 and older and are on the hook to take annual Required Minimum Distributions (RMDs) and pay tax on that amount. If these parameters sound like you, it is possible to ask your retirement plan custodian to directly transfer a gift from your account to the charity and exclude that distribution from your taxable income. The charity benefits from your generosity and you avoid paying taxes on the amount of the gift that would otherwise be fully taxable to you. The direct transfer is the key. This is a “win-win”. You are able to take the higher standardized deduction and still support the charities about which you care. Any one person is capped at $100,000.00 in QCDs for the year no matter how many organization among which this is divided, but if you are married, you can each contribute up to the $100,000.00 maximum. Please note that you can gift more than your required RMD after age 72, but the excess of the gift(s) over the calculated amount cannot be credited to a future tax year RMD.
Since this is such a great deal for charitably-minded individuals, the IRS put in place the “QCD Anti-Abuse Rule” to reign in anyone attempting to take advantage of the provision. It has to do with deductible post-70-1/2 contributions to a tax-deferred retirement account and the best way to understand is to illustrate with an example. Let’s say that Susan and Bob are married Boomers who are both 70-1/2 and are still working in 2022. They look around and see war and inflation and a great deal of uncertainty and decide that it would be wise to pad each of their Traditional IRAs with a maximum $7,000.00 contribution which they are able to deduct on their taxes. Next year in 2023, at age 71, they are still skittish about the economy and their upcoming retirement and, again, each deposits $7,000.00 into their Traditional IRAs and takes a federal deduction. In 2024, they both retire and are faced with taking RMDs upon turning 72 years old. For the sake of argument, let’s pretend that both have an RMD of $10,000.00. To save on taxes, they fix on the bright idea of each gifting their full RMD amount to their favorite charity as QCDs. Guess what? They are prohibited from doing so. Since 70-1/2, each have accrued $14,000.00 in deductible IRA contributions and are forbidden to employ and benefit from the QCD tool until they have exhausted those post-70-1/2 deductible contribution amounts. In 2024, each must take their $10,000.00 RMD and pay taxes on the full amount. In 2025, if both RMDs are again $10,000.00 and they still want to give to charity through a QCD, they must pay taxes on $4,000.00 each of their 2025 RMD and then are able to gift $6,000.00 each with no tax consequences.
There are some legal strategies you can employ if you are still making retirement plan contributions after age 70-1/2 and want to benefit from the QCD. An easy one is to make a deductible contribution through your work retirement plan. 401ks, SEP IRAs and SIMPLE IRAs are all eligible. Another alternative is to make a Roth IRA contribution if your adjusted gross income doesn’t bump up against the income limitations. Maybe an analysis of the deduction will cause you to skip the deduction altogether. And if you’re part of a married couple filing jointly, you can always “divide and conquer” and have one spouse take the deduction for a Traditional IRA contribution and have the other employ a QCD.
Securities offered through J.W. Cole Financial, Inc (JWC) Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc (JWCA). Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.