Tax Planning Technique: Qualified Charitable Distribution

Qualified Charitable Distributions (QCD) allow anyone over 70 1/2 to make their charitable donations directly from their IRA, permitting a tax benefit without itemizing deductions.

The Tax Cuts and Jobs Act of 2017 (TCJA) greatly expanded the standard deduction while limiting tax deductions and eliminating miscellaneous deductions. Together, these changes leave most people unable to itemize deductions, and many of those who still itemize will lose the benefit of some of the amount given to charity. Many charities are feeling the effect of reduced giving as a result of this reduction in the tax benefit of giving. That is why techniques like QCD are vital to maintain not only one's tax saving, but also the vitality of our favorite charities.

The maximum QCD is $100,000 per year per person.

QCD's are reported on Form 1099-R as if they are taxable, but are excluded from taxable income on Form 1040. Since there is no income, the donor does not need a deduction to achieve the benefit of the gift.

QCD is a preferred method of funding charity for those who cannot itemize deductions and have reached the required age (or will soon). Those under 70 1/2, those lacking IRA funds, and those looking to optimize charitable tax benefits of appreciated non-retirement assets must use other techniques referenced below and addressed in other posts.

QCD's CANNOT be paid to a donor-advised fund or to a Section 509(a)(3) supporting organization. These restrictions are unfortunate since separate checks must be made by the custodian to each public charity, which is more cumbersome than using a donor-advised fund. But it is designed to prevent tax benefit from an IRA without completing the donation process.

Checks from the IRA must be made payable to the charity, not the IRA owner/beneficiary. Some custodians mail these checks to the IRA owner for delivery to the charities. Others mail the checks directly to the charity. The latter approach may require a medallion signature guarantee or similar steps to protect the IRA owner.

QCD's often have some benefit even for those who can itemize, though less so under the TCJA. Those having significant mortgage interest, investment interest, medical, casualty,  gambling deductions (or other less common deductions) are more likely to continue itemizing each year, and the QCD technique may be unnecessary, or of limited benefit. QCD should never cause higher tax and usually provides savings.

We are happy to discuss QCD benefits with you.

The new standard deductions are addressed in this post (to do).

Alternate techniques in other posts for tax-advantaged charitable giving include:

  Combining multiple years donations into one year via

     Direct-to-charity giving

     Donor-advised fund, or

     Private foundation

  Using pledges to delay giving until a later year.