RMD problems? 
Want to donate some money? 
Use a QCD

With Quarter 4 officially underway, now is a good time to start thinking about year-end tax planning.

Since the Tax Cuts and Jobs Act (TCJA) of 2017 went into effect, getting tax benefits for donating to charity can be tricky. But for people over the age of 70.5 this year, the tax code creates what might be considered a “right” and “wrong” way to donate to charity (from the perspective of tax efficiency).

The TCJA doubled the standard deduction (in 2022 it is $12,950 for Single taxpayers and $25,900 for Married Filing Jointly). If you are over 65, you get an extra $1,400 added to those numbers. That means a Married Filing Jointly household where both spouses are over 70.5 has a standard deduction of $28,700.

At the same time, the TCJA reduced the opportunity to itemize deductions. For example, the SALT deduction (State and Local Taxes) was capped at $10,000. Also, prior to 2018, you were able to deduct moving expenses if you were moving more than a certain distance for work. That deduction, along with several others, is now gone.

The result of this deduction reduction was that it became much more likely that taxpayers would use the Standard Deduction rather than itemizing.

The reason this is important from a charitable giving standpoint is because if you are using the standard deduction, then you won’t be able deduct your charitable contributions in 2022. The CARES Act provided a brief benefit for charitable contributions during 2020 and 2021. For those two years only, you could deduct charitable contributions without itemizing.

Even then, the CARES Act put caps on how much person using the standard deduction could deduct for donating to charity. If you were single, you could deduct up to $300. Married Filing Jointly taxpayers could deduct $600. This means if you were married, using the Standard Deduction, and donated $10,000 to charity over the course of either 2020 or 2021, you would have received no tax benefits for $9,400 of that donation. Now that those provisions have expired, someone using the standard deduction in 2022 will receive no tax benefits for their charitable donations.

Fortunately, for taxpayers turning 70 ½ this year, there is a way to donate to charity and receive a dollar-for-dollar deduction for that donation. This is called the Qualified Charitable Distribution, or QCD for short.

Please note this article is covering QCDs on broad terms and is not getting into the fine details. If you want to start a deep dive about those details, check out this article from IRA guru Ed Slott.

If you own an IRA, you can issue a distribution directly from that IRA to a charity of your choice. An important note here is that the money must go directly to the charity from the IRA as a direct transfer. Also, sending the money to a Private Foundation, such as the Bill and Melinda Gates Foundation; or contributing the money to a Donor Advised Fund, is against the QCD rules. The money must go directly to a charity, not to an entity that distributes funds to charities.

If you follow the QCD rules, any money that you send to a charity from an IRA will not count as income on your taxes. QCDs represent an “Above The Line Deduction.” This means that charitable contribution is deducted from income as part of the calculation of Adjusted Gross Income. This happens before either itemized deductions or the Standard Deduction get applied to your taxes.

For example, suppose a married couple using the standard deduction is donating $2,000 to their church. Doing it the old fashioned way, they will get $0 in tax benefits related to their church donations.

If this same couple were to instead donate to the church by using a QCD, they could deduct every dollar of their donation. Assuming they donated the same $2000 over the course of the year, at the 22% tax bracket that deduction nets them a tax savings of $440.

But QCDs aren’t just about deductions. QCDs can be an effective way of avoiding tax trouble for people over the age of 72.

People age 72 and older must take Required Minimum Distributions out of their IRA accounts. For some people, an RMD may push them into a higher tax bracket, expose them to Net Investment Income Tax, Additional Medicare Tax, and IRMAA surcharges on Medicare Part B and D premiums. People facing these issues may want to consider a QCD strategy, particularly if their RMD isn’t needed to fund living expenses.

As with any tax strategy, you must be careful to follow the rules. If you want help executing a QCD strategy, or any other tax planning strategy, that’s what we’re here for.