Before I embark on the following important narrative, our legal folks want me to inform you that my suggestion is not intended to be a substitute for specific individualized tax advice. Please discuss your specific tax issues with a qualified tax adviser. Okay, now that the disclaimer is out of the way, let’s roll!
As part of Republicans’ objective to simplify the tax code, they nearly doubled the size of our standard deduction, which could mean that some people will not “itemize” this year. For example, the standard deduction amounts increased to $12,000 from $5,650 for individuals and $24,000 from $11,300 for married couples filing jointly. Therefore, if one’s itemized deductions are not higher than the new standard deduction amounts, one will not get a deduction for their charitable donations. Ouch! As you might imagine, charities are bracing for a giving plunge.
Nevertheless, engaging in an IRS provision known as a qualified charitable distribution (QCD) is more advantageous than ever. To qualify for the QCD, however, you must be an IRA owner who is 70 ½ years or older. If you meet the requirement, you are allowed to make charitable contributions directly from your IRA, and the funds will go directly from your IRA to the charity. The real benefit is that you exclude the distributed money from your taxable income! Eliminating money from your income is the same thing as you taking a deduction! Additionally, your lower income reduces your adjusted gross income, which could reduce taxes that you might be paying on your Social Security benefits.
Here is a simplified example of how the transaction takes place and the subsequent outcome; let’s say that you normally give $5,000 to charity and your required minimum distribution (RMD) is also $5,000. Most folks would simply write a check to the charity and get a tax deduction if they itemized. The new way, for many tax savvy people is to instruct one’s financial advisor to make a transfer from one’s IRA directly to charity. This transaction satisfies the RMD and the income from the distribution is not taxable!
REMINDER: IRA custodians are not required to identify the QCD on your year end 1099-R. So, the responsibility is on us to inform our tax preparer that we performed a QCD. If we don’t let our CPA know, he or she will likely report the transaction as fully taxable, which would negate the benefit of our tax savvy tax planning. Moreover, the charity that receives the donation must provide the same contribution acknowledgment needed to claim a charitable income tax deduction. Failure to obtain the acknowledgment will quash the QCD.
