If you’re over age 70 1/2 and are looking to reduce your taxes while making charitable contributions, you should consider taking advantage of a qualified charitable donation (QCD) from your individual retirement account (IRA) this year.
The IRS ruled that charitable donations after age 70 1/2 made from your IRA accounts will be exempt from taxation up to $100,000 as long as the distribution comes from a qualified account and is donated directly to a charity.
Good news for IRA owners
This is good news for IRA owners that would like to be generous with their funds, while at the same time lowering their overall estate and avoiding taxation on their distribution.
With the new tax laws in place, the standard deduction increased to $12,000 per person and $24,000 per couple. If you have grown accustomed to itemizing on your taxes, especially your charitable donations, you may be in for a surprise when you find out you don’t have itemized deductions greater than the standard deduction, and your charitable donations, in effect, become non-deductible.
The QCD solution
The QCD provides a solution! Instead of making your charitable donation with cash, make the donation via a QCD directly from your IRA’s required minimum distribution (RMD). You don’t get a deduction, but instead, your charitable donation from the IRA is not included in your taxable income and counts towards your RMD. You’ve been able to do this for many years, but special attention to this technique has come into the spotlight after the tax law changes this year.
It is essential that the donation from your IRA go directly to the charity. Additionally, you can’t donate more than $100,000 in aggregate to your charities. Have your IRA custodian make the check payable to the charity. Make sure your charity gets the check, and you receive a donation receipt letter from the charitable organization. When you get your 1099-R around tax time, attach your donation receipt letter to it so your accountant knows you did a QCD.
Sound easy? It is, and the benefits are huge for those now using the standard deduction.
Let’s look at an example. A couple over age 70 1/2 is taxed at 25 percent. They don’t have enough in itemized deductions to exceed the new $24,000 standard deduction. Going forward they should now make their charitable deductions from their IRA RMD’s. If they donate $5,000 to charity, they will save $1,250 off their tax bill!
The QCD has become very popular over the past few years. With the new tax rules and standard deduction, it will only become more widely used.
Qualified charitable distribution rules for 2018
The new qualified charitable distribution (QCD) rules for 2018 should play an influential role in how you withdraw funds from retirement accounts.
The IRS determines how much money you are required to withdraw from your qualified accounts annually, guaranteeing that you will be paying taxes on the previously untaxed money. However, if you can leverage the qualified charitable distribution rules, you can avoid paying taxes on IRA distributions of up to $100,000 a year.
As a wealth management strategy, these new QCD rules can play a significant role in your tax, estate and charitable planning moving forward. It enables you to leave a legacy for your family and for the charities that are meaningful to you. Depending on your situation and charitable appetite, it could be an excellent strategy for you. What a wonderful way to make an impact beyond your lifetime.