Donors over age 70 ½ might be interested in making a Qualified Charitable Distribution (QCD) from their IRA. That’s understandable. A QCD allows taxpayers age 70 ½ or older to exclude up to $100,000 from their taxable income each year. This has the benefit of reducing adjusted gross income (AGI). Qualified Charitable Distributions also count towards the annual required minimum distribution.
The QCD has been around for some time now, but the benefits of the QCD have been reduced somewhat by the tax law passed during 2017. This is because the biggest benefit of the QCD was the ability to reduce a taxpayers AGI. That was important prior to the tax act primarily because the higher a taxpayer’s AGI, the greater the possible phase-out of certain itemized deductions.
All of this changed under the new tax rules, under which itemized deductions are no longer subject to phase-out. Accordingly, one of the biggest benefits of Qualified Charitable Distributions under old tax law doesn’t apply under the new tax law.
That said, there are still areas where keeping your AGI down might matter, such as in years you have high out-of-pocket medical expenses or if you might be subject to the increase in the Medicare tax for higher income individuals. If those situations don’t apply to you, Qualified Charitable Distributions may not be all that important anymore.
Donor-Advised Funds & Qualified Charitable Distributions
If you are at all familiar with the benefits of donor-advised funds, you likely already know that they are very helpful in simplifying the back-end work of giving for you, from vetting organizations to check-writing. Unfortunately, you cannot make a QCD for the purpose of funding a DAF account (a distribution from an IRA for the purpose of funding a DAF account is not considered a qualifying distribution).
However, since one of the major benefits of Qualified Charitable Distributions no longer exists, do you really need to make a QCD?
If you like the convenience of using a DAF account, why not consider skipping the QCD, take the distribution directly, then give it to your DAF sponsoring organization to fund your DAF account?
Although you can’t fund a DAF account with a QCD, a gift for the purpose of funding your DAF account still qualifies for the charitable income tax deduction. So, as long as the amount you contributed to your DAF account does not exceed 60 percent of your AGI, there is a good chance your tax liability will be the same whether you take advantage of the QCD or simply fund your DAF account and forgo the QCD.
The only way to know for certain is to run some projections. Provided you don’t have significant out-of-pocket medical expenses and aren’t subject the extra Medicare tax, chances are your tax liability will be the same.
Run the Numbers
In speaking with donors, we find many Americans have a great deal of their wealth tied up in retirement plans, especially IRAs. For the charitably minded, the IRA QCD offers a helpful way to draw on that wealth and give more than they otherwise might. For others, particularly those with higher incomes and who itemize, it is worth running the numbers to see if you may find additional benefits from skipping Qualified Charitable Distributions and utilizing a donor-advised fund for your giving instead.
Talk to your tax advisor and ask them to help you explore which option will allow you to both maximize your charitable giving while minimizing your tax burden.
*Please note that nothing in this article is intended as tax or legal advice and DonorsTrust is not a tax or accounting firm. You should take no action based upon the contents of this article, as it is educational in nature, only, and is not based upon your facts and circumstances.