Tax Reform and QCDs

Posted at 31st January 2018

As we mentioned in our previous communication, we are continuing to provide you with information about how the new tax bill might impact your situation.

Fortunately, Qualified Charitable Distributions (QCDs) have remained in place under the new tax plan, and their value has now increased significantly.

As a review, a QCD is a distribution from your Traditional IRA that is made payable to a charity and then subsequently donated to said charity. The QCD provision has the potential to be a significant benefit because the amount of the QCD is not reported as income, as opposed to normal IRA withdrawals. This means that no income tax is owed on the QCD, and it also means that your Adjusted Gross Income (AGI) is reduced, which can reduce the amount of your Social Security income that is taxable.

One of the major changes with the tax reform was combining the standard deduction with personal exemptions. Due to this change, the standard deduction for a married couple over age 65 is now $26,500 ($24,000 plus $1,250 over age 65 per person additional deduction). Before the tax reform it was estimated that 30% of taxpayers had more itemized deductions than the standard deduction. Some estimates now peg the figure of taxpayers who will be itemizing their deductions to be as low as 5%. Unfortunately, that means that most people will not receive a tax benefit for their charitable giving. The power of the QCD allows individuals that are taking advantage of it to receive the tax benefit of giving to charity even if they claim the standard deduction.

While your situation will be different, here is an example of the potential benefit of using QCDs. Mr. and Mrs. Jones are both 71 years old and receive $42,000 of Social Security Income, $15,000 from a pension, and take withdrawals from their IRAs of $23,000. That brings their annual income to $80,000. Under normal circumstances, they would have a federal income tax liability of $3,249. If the Jones’s give $10,000 a year to charity, and utilize the QCD provision, they reduce their tax liability by over $2,000! They spend the same amount that they would have otherwise, but by using the QCD, they’ve reduced their taxes by over 60%! Here is a chart of their income and tax liability:

ELIGIBILITY

Any individual that is over 70.5 and has a Traditional IRA is eligible to take advantage of using QCDs. There is a limit of $100,000 per year that can be given to charity via QCDs. QCDs are counted towards the Required Minimum Distributions (RMDs) that begin after turning 70.5, and are a great way to satisfy your RMD if those funds are not needed for daily expenses. If you are not currently using QCDs for your charitable giving, please contact our office to discuss transitioning to using QCDs.

TELL A FRIEND

This tax savings is a win-win for your friends and family members that are over 70.5 and the charities they support, so please pass this along to anyone you think might be interested.  Most people do not fully understand this strategy yet, and even if they do, everyone needs to reconsider it with the new tax changes. We are eager to help everyone take advantage of this opportunity so please encourage them to call us.

TAX REPORTING

While giving via QCDs can be quite beneficial, it is essential to be sure that you are reporting the QCDs correctly when it comes time to file your taxes. For every QCD that you make, you should make a copy of the check, and write QCD on it before filing it with your tax documents. If you work with a tax professional, be sure to let them know of the QCDs that you made during the previous year. When you receive your 1099-R, it will not differentiate between normal distributions and QCDs. Your QCDs will be included with your normal distributions. You will need to have a record of the amount of your QCDs for the year. Please contact our office if you do not have your QCDs recorded.

When filing your taxes, you will list your total gross Traditional IRA distributions on line 15a of Form 1040. If you used QCDs, you will then write QCD on the dotted line to the right of the box for 15a, and then enter the difference between box 15a and the amount that you gave via QCDs in box 15b. Based on the example above, where the Jones’s had $23,000 of IRA distributions, but $10,000 were QCDs, it would be recorded like this:

 

NOTICE

It is possible that the charity that received your QCDs reported the QCD amount on your contribution record and included it in your annual contribution total.  Charities have difficulty distinguishing what is and isn’t a QCD and how to account for it. You are not allowed to double count your QCD, meaning you cannot deduct your QCD amounts as a charitable deduction on schedule A if you have also reduced your income on line 15b (above) by the QCD amount. You will want to subtract out any QCDs from your other giving on your annual charity contribution statements before you give your contribution statements to your accountant.  

While we understand that giving to your church and other charities with a check, debit/credit card, or bank transfer is a simpler process, you could be missing out on significant tax savings. If you are not currently taking advantage of QCDs but would like to start, please contact us.