RMDs & QCDs
(Donating Directly to Charity)
The IRS requires taxpayers over age 70½ to take a Required Minimum Distribution (RMD) from their IRAs each year. This forced IRA distribution adds ‘taxable income’ –thus increasing the amount of taxes you pay to Uncle Sam at the end of the year. One particularly effective strategy to minimize this problem is to donate your RMD directly to charity through a Qualified Charitable Distribution (QCD).
To make a Qualified Charitable Distribution (QCD) you must be over age 70½ and own an IRA account. The QCD takes your RMD directly from your IRA and sends it to your designated 501(c)(3) charity.
Charitable Giving. As we all know, donating to charity has many intangible benefits, such as enhancing our community and improving the lives of others. But charitable giving can also provide tangible benefits by providing income-tax deductions.
Standard vs Itemized Deductions. Typically, the tax benefit of making charitable gifts is only realized by those who itemize deductions when filing their tax returns – not for those who file with a standard deduction. However, when you make a QCD (donating your RMD directly to charity), the distribution is instead automatically omitted from your adjusted gross income (AGI). This means the tax benefit from a QCD can be realized by everyone – regardless of whether they take the standard deduction or itemize their deductions. This is GREAT news for anyone over age 70½ because many taxpayers in that age bracket take the standard deduction. (This is especially timely since the standard deduction for joint filers increases from $12,700 [2017] to $24,000 [2018].)
A direct reduction to your adjusted gross income (AGI) can also yield additional tax benefits:
- A lower AGI may trigger a reduction in Medicare premiums.
- Lowering your AGI can help increase other itemized deductions, such as medical expenses or miscellaneous deductions. This is primarily due to the fact that these deductions must exceed a certain percentage of adjusted gross income before you can count them against your tax liability. Therefore, decreasing AGI creates a lower ‘hurdle’ before those deductions provide tax savings for you.
- Finally, using a QCD to lower your AGI may provide a reduction in your state income tax liability.
If you take advantage of this strategy, it is important that your tax preparer accurately report the QCD on your tax return.