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Do you qualify to utilize a QCD?

If you do, reviewing your QCD strategy this Tax Season should be a priority…

Kathryn W. Gerwig, CFP® Senior Advisor

As you complete your 2017 income tax returns, keep in mind some tax provisions that will possibly be more important for 2018 and future years’ tax planning.  In 2015, the Protecting Americans from Tax Hikes Act made permanent the rules that allow for tax-free Qualified Charitable Distribution (a “QCD”) paid directly from an IRA to a charity. This law permits taxpayers, age 70 1/2 or over, to exclude from gross income donations paid directly to qualified charities from their IRAs (limit of $100,000/year). So instead of paying income taxes on your IRA distributions, the amounts distributed as QCDs are excluded from taxable income and can lower your adjusted gross income.

The benefits of utilizing a QCD are potentially even higher now as we start to optimize for the changes due to the Tax Reform and Jobs Act of 2017 and the subsequent implementation of the new Standard Deduction that may snuff out any direct charitable deductions that you used to claim. The QCD strategy will provide a tax benefit even if you claim the new standard deduction.

While the process of completing a QCD to a charity is fairly straightforward, the key administrative requirement is that the distribution check must be made payable directly to the charitable entity. If the funds go to the IRA owner and are then passed along to the charity, it is still a taxable distribution to the IRA owner and not considered a QCD. Our Advisors work very closely with clients to ensure that the administrative requirements of this process are met in order to secure the tax benefits for you as the donor, and for the recipient charity.

A key element to this strategy is to identify your charitable intentions early in the year. Then you’ll want to compare the total you wish to donate with your required minimum distribution (RMD) for 2018 and plan ahead to reserve enough of your RMD amount to cover the donations.

Due to the associated benefit of lowering your adjusted gross income, additional tax saving benefits from this strategy may also include:

  • Lower Medicare Part B and D premiums
  • Lower taxable Social Security benefits
  • Lower taxes due to some AGI-based limitations/phase-outs

This is a great time of the year to consider if a QCD makes sense for your personal situation. When you review your 2017 tax return, make your donation list for 2018 at the same time. If you aren’t already working with a Financial Advisor, this is a great example of why you should consider doing so. Your Advisor can review the new benefits of the QCD and help determine if that approach will make sense for you going forward