In 2017, Congress passed the Tax Cuts and Jobs Act, which contained major changes to the U.S. tax code affecting taxpayers who make charitable contributions. Because the law almost doubled the standard deduction and capped property tax deductions, consequently fewer individuals will itemize deductions, including charitable contributions. However, retirees who are taking distributions from their IRAs can still experience tax savings through an excellent strategy called a Qualified Charitable Distribution (QCD).
QCDs became permanently legal under the Protecting Americans from Tax Hikes Act of 2015 (also known as the PATH Act). Under the law, retirees who are age 70 ½ or older can donate their Required Minimum Distribution (RMD) to a 501c(3) charitable organization, up to $100,000. Since this is per taxpayer, a married couple filing jointly could potentially give up to $200,000 from their retirement accounts. Why would one essentially give away their RMD?
There are significant benefits to donating IRA assets. First, it satisfies your charitable giving goals, while also satisfying your RMD for the year. Secondly, it provides tax advantages as the distribution would be considered non-taxable to the giver, as well as to the charity receiving. Third, the amount of the RMD donated is subtracted from your total IRA distributions when calculating Adjusted Gross Income (AGI), which can decrease your tax liability in the year of the donation. Fourth, the lower AGI could put you in a lower income tax bracket, which may allow you to avoid certain penalties associated with higher AGIs like higher Medicare premiums, a larger portion of Social Security benefit that is taxed, and the 3.8% Medicare surtax on investment income.
A QCD can be made by either making a direct IRA custodian/trustee donation to the qualifying charity or through a check from the IRA made payable to the public charity. It’s important to remember that the check cannot be made payable to you as the IRA owner, nor can it be made to a private foundation or a donor-advised fund. In addition, a QCD cannot be made from a SIMPLE IRA, SEP IRA, or any qualified retirement plan like a 401(k) or 403(b), as the IRS excludes employer-sponsored plans.
Donating your RMD can be a very tax-efficient way to lower your taxable income while giving to your charity of choice. Feel free to contact the Navigoe team to see if this strategy is appropriate for your situation and goals.