Qualified Charitable Distribution Strategies

It’s time to take a fresh look at Qualified Charitable Distributions after the Tax Cuts and Jobs Act

Many taxpayers, especially retirees with little or no mortgage interest, will no longer itemize their deductions due to the new tax law. Taxpayers will see a nearly doubling of the standard deduction (to $24,000 for married filing joint) and changes (limitations/elimination) to other deductions. Taxpayers who claim the standard deduction will not see any income tax savings from any charitable contributions. Therefore, Qualified Charitable Distribution strategies may offer an option to help with the impact of the new tax law.

New Tax Law and Standard Deductions

Let’s look at a simple example: Bob & Sue Brown (both in their 70’s). For 2017, the Browns had itemized deductions of $20,000: Property taxes paid of $11,000 and charitable contributions of $9,000.

qualified charitable distribution

Assuming the same property taxes and qualified charitable contributions for 2018, the Browns would have $19,000 of itemized deductions ($1,000 less because taxes are limited to $10,000 for 2018). They will take the standard deduction for 2018 because it’s higher than the itemized total. Because the Browns are age 65 and older they qualify for an additional standard deduction of $2,600. Thus, their standard deduction for 2018 is $26,600.

It’s important to note that whether charity was $9,000 or charity was zero, the Browns would still take the $26,600 standard deduction (thus, no tax savings from charity). The Browns don’t give to charity to save on taxes, but if there’s something they can do to yield tax savings from charity, they would be interested. Enter the QCD (Qualified Charitable Distribution).

How Qualified Charitable Distributions Work

Because Bob & Sue are age 70.5 and older they are required to take distributions from their IRA each year. Assume Bob’s RMD (Required Minimum Distribution) is $15,000. He can direct $9,000 of distributions to go directly to charities of his choosing and that will satisfy $9,000 of his $15,000 RMD. The $9,000 will not be included in the Brown’s income which will save them $2,160 if they are in the 24% tax bracket.

Reminder: This strategy only works for those required to take distributions from their IRA.

Please read the following article for more information on how the QCD works and for answers to common questions about the strategy: Qualified Charitable Contributions are a Strategic Way to Distribute Your Required Minimum Distribution.

How DHJJ Financial Advisors Can Help

Watch in future months for articles on charitable giving strategies for taxpayers of all ages. If you feel you can benefit from a Qualified Charitable Distribution, please contact DHJJ Financial Advisors.