If you are over 70 1/2 years old, qualified charitable contributions from an IRA can provide a way to receive tax savings on charitable gifts, even if you decide to take the newly increased standard deduction.
According to “Giving USA 2022: The Annual Report on Philanthropy”, the number of individuals who claimed charitable deductions dropped below 70% for the fourth year in a row. What could be happening here?
The Tax Cuts and Jobs Act (TCJA) is primarily the reason. The Tax Policy Center estimated that the new law would reduce the number of households that itemize deductions from about 37 million in 2017 to 16 million in 2018. While the TCJA made several changes, two of the most critical in terms of charitable giving are (1) putting limits on the itemized tax deductions for state and local taxes (SALT) to $10,000 per return and (2) increasing the standard deduction in 2017 from $6,350 to $13,850 in 2023 for individuals and from $12,700 to $27,700 for couples filing jointly. This move clearly makes it more beneficial for most taxpayers to claim the standard deduction instead of itemizing their deductions.
The upswing of standard deduction use disincentivizes charitable giving since taxpayers will often not get a deduction for their contribution.
However, there is positive news for those over 70 1/2 who want to make charitable contributions while still obtaining some tax relief. The reason for this is that there was no change to the law allowing those over age 70 1/2 to make charitable gifts from their retirement accounts, specifically their IRA accounts, to their chosen charity without recognizing taxable income. This permission allows these individuals to take the standard deduction while still getting the tax break from their donation.
These are called qualified charitable distributions or a QCD. QCDs allow individuals to donate up to $100,000 a year from their retirement accounts, which is typically enough for most taxpayers.
QCDs Becoming More Useful
The passage of the 2017 TCJA has made qualified charitable distributions, or QCDs, though they have been around for quite some time, a handy tool for the foreseeable future. Because of the higher standard deduction, it becomes a benefit for filers to claim the deduction and donate from their IRAs. An example of a beneficial use of a QCD in this manner would be to make a charitable donation from an IRA and apply this amount to satisfy the required minimum distribution (RMD) for the year. This individual will pay no tax on this IRA distribution because the funds go directly to charity. The law allows those over 70 1/2 to make gifts directly to qualified charities while excluding the distributions from their gross income. It’s important to note that RMDs begin at age 73/75, depending on your birth year.)
This strategy was not commonly used in the past because there was no itemized charitable income tax deduction for a gift from an IRA. So, it made more sense for tax filers itemizing to donate directly to a charity and deduct the donation. However, since almost all will be taking advantage of the higher standard tax deduction, the use of QCDs has been and will be more advantageous.
QCDs May Have a Double Benefit
QCDs may also reduce Medicare premiums. High-income filers can watch their Medicare premiums increase by hundreds of dollars every time their income peeks just 1$ above the predetermined income levels. A high-earning couple in their 70s may use a QCD to reduce their premiums now and in future years.
Requirements for QCDs
When you attempt to make a QCD, it’s wise to remember the requirements that are to be met to ensure that the contribution does indeed qualify for this special treatment. Here are the qualification rules:
- The check for the QCD must be made payable to the charity directly from your IRA account.
- Donations to private foundations and donor-advised funds do not qualify for QCDs. The charity must be classified as a 501(c)(3).
- The donor must check with their custodian to see if any other specific forms or requirements are necessary to make a valid QCD.
Although qualified charitable distributions, QCDs, have been an available tool for a while, the TCJA has given them quite a boost into the forefront and will make them much more utilized in the future. Those over age 70 1/2 can kill two birds with one stone by claiming a standard deduction and getting a tax break for donating to charity directly from their IRA using a QCD.
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