Giving Tuesday was created in 2012 by the 92nd Street Y and United Nations Foundation as a “Global Day of Giving”. By designating the Tuesday after Thanksgiving as Giving Tuesday, organizers desired to establish a day focused on celebrating the generosity of giving, a great American tradition. In light of the giving season, this article focuses on a tax-efficient way that individuals who are 70 ½ or older can use an IRA for charitable giving.
While the United States has a long history of encouraging charitable giving through tax legislation, the 2017 Tax Cuts and Jobs Act reduced the number of people who will be able to deduct charitable contributions for 2018. This change resulted from the increase in standard deduction which eliminated tax benefits of charitable giving for individuals who are no longer able to itemize. While the new tax law reduced the number of people who can itemize deductions, there are several financial planning strategies that can offer tax benefits for many individuals in their charitable giving.
Individuals receiving required minimum distributions (“RMDs”) from an IRA and are interested in giving to charity should consider using qualified charitable distributions (“QCD”) to satisfy all or part of their annual RMD. Using QCDs for charitable giving can provide benefits for individuals who are taking the standard deduction as well as many who are still able to itemize deductions.
A large number of people are missing out on this valuable tax break, and time is limited to take advantage of this strategy for 2018 since the deadline is December 31st.
Important Information about Qualified Charitable Distributions
- Individuals are able to use a QCD if they are an IRA owner or beneficiary and at least 70 ½ years old.
- The new tax law makes QCDs more valuable than ever since more individuals will be taking a standard deduction for 2018. The higher standard deduction resulting from the new tax law eliminates the tax deduction on charitable gifts for individuals who are unable to itemize, and QCDs can remedy this situation by providing a tax break for 2018 contributions.
- A QCD can add to the standard deduction since it allows donations from an IRA to charity to be excluded from income. The reduction in taxable income by using a QCD can result in a lower tax bracket in addition to reducing the taxable income used in determining Medicare Part B premiums.
- The annual limit for QCDs is $100,000 per person, and married couples (who both qualify) can each do a QCD up to $100,000 per year.
- Individuals cannot receive anything in return for the donation. Gifts to donor advised funds or private foundations do not qualify as a QCD.
- The QCD must be a direct transfer from the IRA to the charity; however, a check made payable to the charity that is mailed to and delivered by the IRA owner to the charity will also work as a QCD.
- Individuals can do a QCD from their IRA, inactive SEP or SIMPLE IRA; however, QCDs are not available from employer plans.
- QCDs apply only to taxable amounts in an IRA which is an exception to the pro-rata rules usually applied to traditional IRA distributions.
- Individuals should retain records of QCDs and inform their tax preparer since the Form 1099-R provided by an IRA custodian will not have information indicating that the distribution was a QCD and thus excluded from taxable income.
In addition to QCDs, individuals should consider other tax-smart giving strategies under the new tax law and leverage the impact of their philanthropy. Qualified financial planning professionals can review potential strategies to help families maximize tax benefits of their charitable giving and develop an individualized financial plan to support their favorite charities and create an enduring legacy.
The information contained in this article is general and should not be considered legal or tax advice. Consult with an appropriate professional regarding your circumstance.