The Tax Cuts and Jobs Act (TCJA, 2017) significantly altered the tax landscape by lowering marginal rates, nearly doubling the standard deduction (and indexing it to inflation), and capping or eliminating several categories of itemized deductions. For most taxpayers, the net impact of these changes was positive (i.e., a modestly lower tax liability). Even so, the percentage of Americans who found it worthwhile to itemize deductions was roughly cut in half, from 20-25% before the TCJA to less than 10% afterward.
Initially, this had a slight cooling effect on charitable giving. With fewer households eligible to itemize, the after-tax cost of donations increased, leading to a slight decline in charitable gifts in 2018 vs. 2017 (to be fair, many households may have also elected to pull forward philanthropic gifts in 2017, inflating the figure for that year).
One strategy that evolved in response to the TCJA was to “bunch” charitable donations in alternating tax years. For example, an investor might combine several years’ worth of planned gifts into a single lump-sum donation during a year they planned to itemize, then revert to taking the standard deduction in subsequent years. Many of our clients utilize this strategy via gifts to Donor-Advised Funds (DAF), which allows them to front-load the tax benefits of gifting in a single year but continue dispersing funds to their favored organizations over time.
Yet another charitable giving strategy—available since 2006 but not widely utilized—is the Qualified Charitable Distribution (QCD). This option allows IRA owners aged 70.5 and above to directly distribute to qualified charities from their IRA account (up to $100K per individual in 2023, indexed to inflation in subsequent years).
The main benefit is that the amount of the distribution counts toward the required minimum distribution (RMD) but is excluded from the adjusted gross income of the account holder. Since these are direct gifts made from pre-tax assets, there is an immediate embedded tax benefit (equal to the IRA owner’s marginal tax rate multiplied by the dollar value of the gift). IRA owners realize this tax benefit on top of the standard deduction if they cannot itemize.
Who is a Good Candidate for a QCD?
A QCD is ideally suited for someone aged 70.5 or older with an IRA account, making regular but modestly sized charitable gifts. Moreover, a QCD is especially useful for IRA owners who have a large IRA balance or have reached the age where they are obligated to take annual Required Minimum Distributions (RMDs).
In some situations, a QCD may also help taxpayers keep their adjusted gross income below a threshold that preserves eligibility for other deductions or minimizes additional taxes such as the tax on social security benefits, the Net Investment Income Tax (NIIT), or Medicare’s Income-Related Premium Adjustments.
However, details matter with QCDs: We recommend making IRA donations earlier rather than later in the year because of the “first dollars out” rule, which could prevent a taxpayer from benefiting from a grant once the annual RMD amount has been met. Payments must be made directly to the charity from the IRA account. Finally, donations cannot be made to private foundations or Donor-Advised funds.
We also note that your custodian does not detail the donation on form 1099-R disclosing IRA distributions. Keep good records, and remember to pass on the information to your tax preparer, who will make the necessary adjustments to report it correctly (line 4b of Form 1040).
In summary, the QCD is an important yet underutilized tool for optimizing taxes in retirement via a thoughtful, well-conceived spending strategy. If you’d like to know more about how a QCD might apply to your situation, schedule a call with one of our principals by clicking the "Book Now" button below:
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