Qualified charitable distributions (QCD) are poised to become even more popular under the new tax law.
While the Tax Cuts and Jobs Act (TCJA) generally doubled the standard deduction, while eliminating many itemized deductions, financial advisors will want to update their clients on the potential tax-saving benefits of qualified charitable deductions (QCDs) now that they have been made permanent.
Remember that a charitable contribution is itself an itemized deduction, so most taxpayers will no longer receive the full deduction value—unless all other itemized deductions exceed the standard deduction amount. In other words, far fewer taxpayers will itemize, thus fewer taxpayers will be able to take advantage of the deduction for charitable giving.
If due to the TCJA, the tax-saving value of a charitable contribution is not what you realized in prior years (i.e., results in a lower deduction), consider other options, such as qualified charitable distributions.
Why Qualified Charitable Distributions Are More Valuable Than Ever
QCDs can be a much more beneficial means of making charitable gifts for those taxpayers who are at least age 70½ and own an IRA. Why? A qualified charitable distribution allows a taxpayer to use a standard deduction and receive a tax break for donating IRA funds to a public charity. Donating a large IRA, for example, would save you from making required minimum distributions (RMDs), and reducing those RMDs via QCDs can have a significant impact on reducing your tax liability.
QCD Offers Big Benefits for Those 70½ or Older
QCDs allow an IRA owner or beneficiary age 70½ or older to donate up to $100,000 annually to a charity tax-free. If you are married, each spouse can transfer up to $100,000, for a total of $200,000 annually, assuming each IRA owning spouse is 70½. Not all charities, however, are eligible; for example, private foundations and donor-advised funds are ineligible.
Tip: The account owner or beneficiary must be 70½ at the time of distribution to qualify for a qualified charitable distribution.
How Do QCDs Affect Required Minimum Distributions (RMDs)?
The QCD can satisfy an RMD for the year; but, again, the QCD is capped at $100,000.
What Are the Advantages of QCDs?
One significant advantage for many IRA owners is that utilizing a QCD can satisfy your annual RMD, which means those funds are not included in your taxable income for the year. For IRA owners who do not need their RMDs for living expenses and want to avoid additional taxable income, a QCD is a valuable option. After all, reducing RMDs will lower reported gross income.
How Does One Donate QCD Assets?
Distributions must go directly to a public charity via trustee transfer. It’s all right for proceeds to be mailed to an IRA owner–as long as the check is made payable to the charity. If the check is made out to the IRA owner, donating it would not qualify as a QCD.
Download Lord Abbett's article "Tax Reform Favors Charitable Giving From IRAs" to learn other QCD rules to keep in mind.
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Download Lord Abbett's explanation of how Tax Reform Favors Charitable Giving from IRAs