How Seniors Can Make Tax-Free Charitable Deductions (QCD's)

Great gifting strategy for senior citizens

If you or your parents are at least 70 1/2 years old and make charitable gifts than this article could save you a lot of income taxes.

The 2017 Tax Cuts and Jobs Act made a special gifting strategy especially attractive for seniors making charitable gifts. Since the new tax law limits itemized deductions, most people will not itemize their deductions (one of which was charitable contributions) going forward. This is, however, an especially good opportunity for people over 70 1/2 years old to take advantage of for tax reasons.

If you or your parent is over 70 1/2 years old and has an IRA, then read on.

Age 70 1/2 is a key age for people with an IRA account. At that age, the law makes you take an annual distribution from your IRA.

How to Avoid Disastrous RMD Penalties

For example, at age 71 you are required to take just under 4% of your prior year-end balance. Typically, you would take the distribution and have to add that dollar amount to your income tax return as ordinary income. Each year you are required to take a slightly higher percentage of your prior year account balance and pay the appropriate tax.

If you fall into this category, and make charitable contributions than you should strongly consider taking advantage of the Qualified Charitable Distribution (QCD) strategy.

QCD, is a super opportunity in the tax code. Qualified Charitable Distributions allow people to take their IRA, Required Minimum Distribution (RMD), and give any portion of it directly to charity, without incurring income tax. Since the 2018 Tax law, this strategy is even better.

Let’s look at an example:

You are age 71 and as of 12/31/2017 your IRA account balance was $300,000. Your Required Minimum Distribution for age 71 would be $11,320.

When you receive tour check for this amount from your IRA custodian then you simply add the amount to your ordinary taxable income when you file your tax return. If you happened to make $5,000 in charitable contributions during the year and do not itemize your deductions (you use the new much greater standard deduction) then you no longer receive a tax deduction for your contributions.

If, instead, you have your IRA custodian implement a QCD, then you have the $5,000 go directly to your church or charity. When you do it this way, you do not pay income tax on the contribution! The tax savings can be hundreds or even thousands of dollars per year depending on the size of you contribution and your tax bracket.

What if you have a $1,000,000 IRA balance at age 76?

Your RMD is $45,454 and that would cost you $5,454 in tax at the 12% tax bracket or $10,000 at the 22% rate.

For every contribution dollar that you give using the QCD it will save you the tax you would have owed on the distribution.

Other Tax Factors:

The RMD creates more taxable income, potentially making your social security income taxable. (see SS link). Higher Medicare premiums could also be triggered with more taxable income. Your Medicare premium is determined by your past income (see link to Medicare premiums).

With the new tax law, many people will no longer itemize their deductions, instead taking advantage of the standard deduction that was doubled to $24,000 for a couple. Therefore, the deductibility of charitable contributions is gone for most people so being able to take your RMD without paying tax is fantastic.

Other key points:

RMD’s only apply to IRA’s and the account owners that are over age 70 1/2.
In order to make this happen, the distribution check needs to be paid to the qualifying charity, and not directly to you.
The limit is $100,000.
The charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions.
A Donor-Advised fund does not qualify for this.
Make sure to do it in the proper way and discuss this with your tax advisor.