Let’s talk about Qualified Charitable Distributions.

Let’s talk about Qualified Charitable Distributions.

If I could show you a way for your ‘older’ clients to take money from their IRAs and not pay tax, would it be worth it for you to read on?

Let’s begin with some facts:

Fact:  Retired clients don’t like to be forced to take money from their IRAs.
Fact:  Retired clients still give money to charities.
Fact:  Retired clients think they shouldn’t owe taxes since they are of a certain age.
Fact:  Some clients over age 70½ are not retired but are still forced to make withdrawals from their IRAs.

Assume, if you will, that all of these facts are, well, factual. What can you do as a practitioner to give your over-age-70½ client some options based on these facts?

Let’s talk about Qualified Charitable Distributions (QCDs)…..(IRC §408(d)(8) for you code heads out there)

Here’s a fact to begin with…it’s not a new law!

The qualified charitable distribution (QCD) first came to us as part of the Pension Protection Act of 2006. It was effective from August 17, 2006 through the end of 2007. Since that time, it has been extended or renewed (albeit sometimes retroactively, which really messes up year-end planning). With the enactment of the PATH Act in 2015, QCDs became permanent.

I’ll be honest with you (and I expect this has been your experience too) – this has been a sleepy little provision of law which few taxpayers have taken advantage of over the years. Yet, we expected our clients to flock to it—never happened did it?

Well—enter the Tax Cuts and Jobs Act of 2017 (TCJA) and all of a sudden, the QCD comes roaring back to life:

Why?

Before I get to the ‘why,’ I think we need to visit the rules.

Rule #1:  You need a client with traditional IRA balances.

Rule #2:  Your client must be in the RMD years meaning, under current law your client is at least age 70½. (yes there are proposals making their way through Congress to increase the RMD age to 72, but no new law exists yet)

Rule #3:  Your client must be willing to instruct the IRA custodian to send money directly (direct trustee to charity) from his IRA to a qualified charity. Note: The IRS indicates that it’s acceptable procedure for the IRA custodian to make a check payable to the charitable organization and let the IRA owner deliver the check to the charity.

Rule #4:  Your taxpayer can’t contribute more than $100,000 per year under Rule #3.

What does your client get in return for following these rules?

1. The amount sent to the charity counts toward the RMD the taxpayer needs to take that year.
2. The amount sent to the charity will NOT be included in the taxpayer’s adjusted gross income.
3. In return for not being included in the adjusted gross income of the taxpayer, there is no charitable deduction permitted for the amount sent to the charity.

So let’s get back to the why…

QCDs have come roaring back as a planning option for our clients over age 70½……it’s all because of TCJA. This resulted in the near doubling of the standard deduction, making itemizing deduction more difficult during the TCJA years.

Let’s consider an example:

A married couple will file jointly in 2019. They are both age 73 and have adjusted gross income (AGI) of $140,000, which includes $12,000 in RMDs. Although they don’t have enough itemized deductions to get over the standard deduction of $27,000 ($24,400 2019 standard deduction + $1,300 additional each for being at least age 65), they still plan to make charitable contributions totaling $7,500.

Their 2019 federal taxable income is $113,000 ($140,000 AGI, less a standard deduction of $27,000, resulting in federal tax of $16,577.  Instead of making that $7,500 check out to their charity (which, by the way, they received no tax benefit for since they couldn’t itemize deductions), they instruct their IRA custodian to send that $7,500 from one of their IRAs. Voila! Taxable income is $7,500 less, the tax is $1,650 less, and the charity still receives their money.

I would expect $1,650 in tax savings to get your client’s attention, but there can be other benefits depending on the client’s situation such as:

• Avoiding higher Medicare premiums
• Less social security could be taxable
• Potential higher allowed medical expense deduction due to lower AGI (although they would have to be able to itemize to realize any benefit)
• Passive loss limitation (up to $25,000) from rental real estate activities could be impacted
• Net investment income tax reduction

That’s just to name a few, and I’m sure I’m missing some other benefits you might discover working with your particular client and their unique situation.

Other rules:

• Rule #1 told us the taxpayer needs to have traditional IRAs, so don’t do this with Roth IRAs, especially given that ROTH distributions are likely already tax free…..what’s the point?
• QCDs cannot come from a SEP or SIMPLE IRA.
• The charity must be one that is approved by the IRS. The taxpayer can’t simply turn the money over to their friend who needs help or have the money sent to the Human Fund (Seinfeld reference). Eligible charities include 501(c)(3) organizations and religious organizations. Donor-advised funds are not permitted to receive QCDs.
• If you or your client are concerned about a given charity being eligible, IRS provides a research tool.
• Rule #4 previously told us the maximum amount that can be donated through a qualified charitable distribution is $100,000 per IRA owner per year as of 2019. This means that each spouse can donate $100,000 (assuming they both have at least that much in traditional IRAs). However, they can’t split or share the limit. For example, one spouse can’t give $160,000 and the other $40,000. Each taxpayer is separately subject to the $100,000 annual limit and there’s no carryover.  The $100,000 limit starts new each year.
• The trustee to IRA distribution needs to be completed by December 31 to count for the given tax year.

Caution: Talk to your client!  Form 1099R has no provision to indicate a QCD was done. You will need to know your client had a QCD when you enter the 1099R information into your software. The 1099R input screen should have an area to indicate how much went out as a QCD. On the 1040, next to Line 4a, your software will print ‘QCD’ and only the remaining taxable amount (if any) will be shown on Line 4b.

Now is the time to talk with our client because we learned a QCD must be completed by the end of the year.  Discussing this option with your client at your tax prep meeting next March will mean nothing for 2019. Rather, it will fall under the heading of ”I have some great ideas for next year.”

by Tom O’Saben, EA