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Tax reform eliminated most deductions for charitable contributions. But for older individuals and married couples, a qualified charitable distribution from an IRA may still have income-reducing potential.

Tax strategies

Your IRA May Be a Remedy for Your Loss of Itemized Charitable Deductions

  • Jessica Rusnock
  • Dennis Buelow
  • 3/27/2019

Due to recent changes in tax laws, nearly 90 percent of individual tax filers will use the standard deduction this year rather than itemizing as they have in the past. While this change has benefited low income earners and business owners, it may also have a negative impact on charitable giving — some might be less inclined to make a contribution if it is not deductible.

For those who are charitably inclined but are no longer able to lower their tax bill by deducting their donations, there may be another way: qualified charitable distributions (QCD).

Qualified charitable distributions start with an IRA

QCDs are available to any taxpayer who is more than 70.5 years of age and has funds in an individual retirement account (IRA). These distributions come from the IRA and are paid directly to a public charity of the owner’s choice (there are exceptions). QCDs cannot exceed $100,000 per taxpayer per year. The QCD counts toward the taxpayer’s required minimum distribution (RMD) amount in any given year.

If a charitable contribution is already planned, making a QCD directly to the charity can lower income and help save significant tax dollars.

The amount of the RMD depends on the individual’s age and the total of funds in IRAs. RMDs could push a taxpayer into a significantly higher tax bracket, and may even cause Social Security benefits to be taxable and Medicare premiums to increase. By making a QCD from an IRA to satisfy the RMD, the distribution is not included as taxable income, nor is it available for a deduction.

If a charitable contribution is already planned, making a QCD directly to the charity can lower income and help save significant tax dollars.

An example of how a QCD can lower taxable income

A couple, filing jointly, has total income of $100,000 and an RMD of $30,000 from their IRAs. They intend to make a $15,000 contribution to Charity A. If they were to take the RMD and make a traditional charitable contribution, their income would increase to $130,000.

Because their itemized deductions, aside from charitable contributions, are only $6,000, they would continue to take the standard deduction ($6,000 + $15,000 = $21,000 which is less than the $24,000 standard deduction for a couple). Subtract the standard deduction from their $130,000 income, and they end up with $106,000 in taxable income.

If the couple were to use a QCD strategy, their income would be $115,000, less the standard deduction of $24,000, making their taxable income $91,000.

Choose the tax strategy that is best for you

Depending on your financial and legacy goals, there may be additional strategies available to help reduce your taxable income, which may include:

How we can help

CLA wealth advisory professionals can guide you through multiple scenarios so you can explore QCDs and other investment and tax strategies and determine the best fit for you.

Read our article about how deduction stacking and donor advised funds can lead to potential tax savings.

  • Jessica Rusnock
  • Senior Wealth Advisor
  • CLA Greenwood Village
  • CliftonLarsonAllen Wealth Advisors, LLC