Managing Money

Consider a QCD to Maximize the Tax Benefits of a Charitable Contribution

With the 2021 tax season ending, most taxpayers have shifted from 2021 tax preparation to 2022 tax planning. While there’s no silver bullet to avoiding taxes, charitably inclined taxpayers who are subject to required minimum distributions (RMDs) may be able to use qualified charitable distributions (QCDs) to save thousands in taxes.

In 2018, the Tax Cuts and Jobs Act (TCJA) doubled the standard deduction and capped the so-called SALT (state, local and real estate taxes) deduction at $10,000. As a result, only one out of 10 taxpayers now itemize. In other words, many charitably minded taxpayers who once itemized deductions now claim the standard deduction and receive no tax benefit from their charitable contributions. [The Coronavirus Aid, Relief and Economic Security (CARES) Act, allowed taxpayers to deduct up to $300 ($600 for married couples) in charitable contributions when claiming the standard deduction. This, however, was a temporary benefit applying only to the 2020 and 2021 tax years.]

While the TCJA had a negative impact on many charitably inclined taxpayers, a QCD strategy may help reduce the taxes of those who are subject to RMDs.

By simply changing how they donate—through QCDs instead of cash—it’s possible for individuals to realize tax benefits on the full value of

BY SIMPLY CHANGING HOW THEY DONATE— THROUGH QCDS INSTEAD OF CASH— IT’S POSSIBLE FOR INDIVIDUALS TO REALIZE TAX BENEFITS ON THE FULL VALUE OF THEIR CHARITABLE CONTRIBUTIONS.

their charitable contributions. In fact, the QCD provides two benefits: first, the amount of the QCD will be excluded from taxable income; second, the value of the QCD counts towards satisfying RMDs.

In many cases, even taxpayers who itemize may benefit from a QCD. For example, consider spouses, both age 72, who are subject to a $20,000 RMD and who have $30,000 in itemized deductions, consisting of $10,000 in taxes and $20,000 in charitable contributions.

In 2022, the standard deduction for a single taxpayer is $12,950 and $25,900 for married couples filing jointly. In addition, taxpayers 65 and older receive an extra deduction of $1,700 for single individuals and $1,400 for married individuals.

Including the additional deduction for those 65 and older, this 72-year-old couple is entitled to a standard deduction of $28,700, which means they are realizing a tax benefit on only $1,300 (the amount their itemized deductions exceed the standard deduction) of their $20,000 in charitable contributions. If they donated the $20,000 via a QCD instead, and then took the standard deduction, they would reduce their taxable income by an additional $18,700 compared to the cash contribution strategy.

There are several rules relating to QCDs to be aware of. For starters, taxpayers must be at least age 70½ when performing a QCD, and the maximum allowable QCD is $100,000 per year. For married couples, each spouse may make a $100,000 QCD from his or her own IRA.

For the QCD to count towards an RMD, the taxpayer must be subject to an RMD in the year of the QCD (the

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SECURE Act increased the RMD age to 72 but left the QCD age at 70½).

The funds must be transferred directly from the taxpayer’s IRA to the qualified charity, which can be accomplished by requesting that the IRA custodian issue a check payable to the charity. The check may be mailed directly to the charity or mailed to the IRA owner to forward to the charity.

Finally, only IRAs, including inherited ones, are eligible for QCDs (Roth IRAs are eligible, too, but it rarely makes sense to do a QCD from a Roth IRA).

Note that employer-based retirement plans, such as the Thrift Savings Plan (TSP), are not eligible for QCDs.

To use TSP money to make a QCD, you must transfer the money to an IRA first.

It’s also worth noting that certain charities, such as donor-advised funds and private foundations, are not considered qualified charities for QCD purposes.

For taxpayers charitably inclined and subject to RMDs, consider a QCD if you’re not receiving a tax benefit on the full value of your charitable contributions.

MARK A. KEEN, CFP®, IS PARTNER, KEEN & POCOCK, AND AN INVESTMENT ADVISER REPRESENTATIVE AND REGISTERED PRINCIPAL OF THE STRATEGIC FINANCIAL ALLIANCE, INC. (SFA). SECURITIES AND ADVISORY SERVICES ARE OFFERED THROUGH SFA.

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