Writing Tax Check



With the passage of the Protecting Americans from Tax Hikes (PATH) Act in 2015, Congress gave taxpayers (and their financial planners) the gift of certainty by making Qualified Charitable Distributions (QCD) a permanent provision for all years going forward and providing the opportunity to be more proactive around charitable, tax, and estate planning. The Tax Cuts and Jobs Act that passed in 2018 made significant changes to tax law, including the removal of numerous itemize-able deductions.

However, there is a strategy for older taxpayers with little need for additional income. An IRA owner that must make required minimum distributions (RMD) can choose to donate up to $100,000 from their IRA directly to qualified charities to lower their tax liability.

Here’s how it works. The QCD provision (26 U.S. Code § 408(d)(8)(B)) allows IRA owners that are 70 1/2 years of age and older to make charitable donations from their IRA and exclude the distribution from income. This distribution to charity offsets the amount of RMD dollar for dollar. This may be a valuable tool for high bracket taxpayers who have no need for additional cash flow and significant itemized deductions under the previous tax law.

A QCD requires that the IRA owner not receive the distribution as usual, but instead the IRA owner will directly transfer funds to a qualifying charity, avoiding taxation on that transferred amount, and satisfying that year’s RMD by the amount donated to charity. A check made payable to the charity, but sent to the IRA owner so it can be delivered in person, is also permissible.

QCDs must be made to a qualifying 501(c)3 charity, not a private endowment or Donor Advised Fund. QCDs can only be made from IRAs and not other qualified accounts such as 401(K)s or 403(B)s, but Simple IRAs and SEP IRAs do qualify as long as a contribution was not made to those accounts in the same year as the QCD. There is a maximum amount that can be excluded from income in a single year. QCDs can be used to exclude from income no more than $100,000 per year – though there is no limit on how much can be distributed to charity from an IRA.

The IRA owner will include the amount of the QCD on their 1040, but then exclude that amount from their Adjusted Gross Income (AGI), fully avoiding taxation on the gifted amount. By reducing AGI, the amount of taxable social security could be reduced by lowering taxable income enough to stay in, or move to, a lower tax bracket. QCDs may also provide additional benefits to a taxpayer by reducing adjusted gross income and lowering Medicare premiums. Some may consider QCDs as gifts that truly give something back to philanthropic taxpayers.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Opinions expressed are those of the author and not necessarily those of Raymond James. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

If hyperlinks above will be included for clients: Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors.

Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.