Are you over age 70 ½ and donate to charity? If so, then with the high standard deduction, you may know that it is likely you will never itemize deductions again. If you are married, your standard deduction is now a whopping $28,700 (for 2022). Your charitable contributions (and other allowable deductions) are unlikely to be greater than the standard deduction of $28,700 . If you take the standard deduction, you will no longer receive a tax benefit for making out-of-pocket charitable contributions. To be clear, you will therefore claim the higher standard deduction, and get no financial benefit for any of your itemized deductions, including your charitable contributions.
If you are over age 72, you also know that you are subject to the required minimum IRA distribution (RMD) rules. This means you are required to take out a portion of your IRA and this withdrawal is taxable income. For many retirees these RMD's are more than they need, and they would like to somehow minimize these distributions.
What if I told you that you can have your cake and eat it too?
Qualified Charitable Distributions (QCDs)
For those who donate to charity and take the standard deduction, there is a little known strategy to save tax dollars. It is called a Qualified Charitable Distribution (QCD) which allows you to direct some or all of your RMD to your favorite charity. The maximum QCD per person is $100,000 per year (2022).
The amount directed to the charity will NOT be taxable for federal tax purposes. Better yet, the charitable distribution is NOT in addition to your RMD, but is part of it (if you are subject to RMDs). Finally, you are still eligible to take the standard deduction of $28,700 . The net result is that you just "deducted" your charitable contribution for the year. This is because the portion of your retirement account that you sent to the charity (via the QCD) is not getting taxed. Again, not only is your taxable income lower as a result of the QCD, but you still get this new super high $28,700 standard deduction.
So, the QCD lets you benefit from making the gift to the charity even without itemizing.
If you are over age 72, the QCD is reducing your RMD and this lowers your taxable income which can also have other benefits. For example, it may help keep your income below a threshold that could otherwise subject you to higher Medicare premiums. It can also result in exposing less of your Social Security to taxation. All good things!
The IRA owner must actually be age 70 ½ or older on the date of the QCD. In other words, just because you turn 70 ½ later this year, does not mean you can do the QCD now (as is the case with a RMD). Instead, you must wait until you are actually 70 ½ to distribute the QCD.
One important caveat of using a QCD to satisfy an RMD obligation is that once an RMD is satisfied for the year, a future QCD cannot offset that income. This makes it important to plan early in the year or at the very least before you take your first IRA distribution. Another timing decision is understanding that the QCD must be taken within the calendar year.
Processing a QCD
Mallard Advisor clients can request that part/all of their IRA distribution (subject to the limit of $100k) be directed to a charity by giving us a call. Because there is paperwork involved for EACH QCD, it works best for one-time (per year) QCD's.
Why We Prepare Taxes for Our Clients
The IRA custodians, like TD Ameritrade, are NOT required to identify the QCD on your 1099-R tax form. Therefore, unless you specifically tell your tax preparer about the QCD, they would end up reporting this transaction as a fully taxable distribution - which would negate the benefit of this tax planning strategy!
This is a good example of why we prepare taxes for our clients. We know about our clients' QCD's because we recommend them, we process them with TD Ameritrade, and therefore when it comes time to prepare the income tax returns, we know to exempt the QCD from their taxable income.
If you are over age 70.5, taking the standard deduction, and would like to make a gift to charity, consider taking advantage of the QCD.