Making Charitable Contributions Count (Part II)

In a recent post, we discussed a strategy for taking greater advantage of charitable contributions, noting that many times taxpayers do not get a true tax benefit from the deductions because they cannot beat the hurdle of the standard deduction.  While that post focused on donor advised funds, there is another tool known as a Qualified Charitable Deduction (QCD) from an Individual Retirement Account that is not utilized as often as it should be either.  QCDs apply only to taxpayers over the age of 70 ½.

As a reminder, under current law, a married taxpayer over age 70 ½ can take either greater of the standard deduction of $29,200 or their total itemized deduction, with itemized deductions being made up of medical expenses, state and local taxes, residential mortgage interest and charitable contributions.  The state and local tax deduction is limited to $10,000 for a married couple, medical thresholds are almost impossible to hit unless there is something catastrophic or an individual enters a nursing home and most farmers do not have a mortgage on their personal residence.  That said, to get over that $29,200 threshold and make the contributions viable tax deductions you must donate $19,200 before the next dollar starts to make a difference, assuming you have a $10,000 state tax deduction.

The IRS allows for those taxpayers over the age of 70 ½ (the old Required Minimum Distribution age) to transfer up to $100,000 per individual, per year to qualified charities tax-free each year.   To imitate a QCD, a taxpayer informs their IRA custodian (local bank, investment rep) of their desire to make a transfer.  The custodian then drafts and mails the check directly to the charity, bypassing the IRA owner.   When it comes time to file the tax return for the year, the amount of the total withdrawal is reported on the taxpayer’s 1099-R but only the portion that the taxpayer retained is taxable.  Thus, in a way one can double dip, especially if already subject to required minimum distribution rules.  Assume my RMD is $50,000 annually and I decide to do a $40,000 QCD, retaining $10,000 of the distribution for myself.  I had to take the $50,000…no choice…it was going to be taxable income regardless.  But, by using the QCD for a donation I was going to make anyway, I’ve permanently sheltered $40,000 from income tax.  In addition, I still get to use the full standard deduction, for a combined reduction in taxable income of $69,200, if married filing joint.

Some of the other benefits beside the tax deduction include:
*If more than the RMD is taken, a $100,000 annual reduction in estate tax value can be achieved
*For some reason, people seem to hate paying income tax on inherited IRAs.  If you have included a charitable component in your estate plan, use the IRA to get it done and let your beneficiaries inherit asset on which income tax has already been paid.
*Most IRA custodians allow for multiple QCDs in varying amounts during the year. You are not locked into one charity or one amount.
*If you are looking at a big income year and have an RMD to take, consider using this strategy if for nothing else than to do some good.  Unfortunately, though, unlike a donor advised fund, the monies have to be transferred to the charity in the year of the distribution (although one could use their donor advised fund as the charity).

One caveat, the 1099-R that you receive from your IRA custodian to report the distribution will not include information the QCD.  It will report the gross total distribution.  If you make QCDs, make sure that you tell your tax preparer so that the income reported on your return can be adjusted.  The tax preparer will have no indication that such a transaction was completed without you informing them of it.

As we noted in the last post, if charity is something that is important to you, using your IRA to make contributions is highly advantageous for tax purposes.  Talk to your IRA custodian now, so that you can capture as many 2024 donations as possible within QCDs.