Qualified Charitable Distribution Can Help Older Taxpayers Benefit Without Itemizing Deductions

The Tax Cuts and Jobs Act (TCJA) has made itemizing deductions less attractive and, as a result, the number of taxpayers who itemize on their personal tax returns is estimated to decrease by at least 50 percent. But that doesn’t mean tax-savings opportunities no longer exist. It just means you have to get more creative.

By using the qualified charitable distribution (QCD), those who are 70 ½ or older no longer have to itemize their charitable deductions to receive a tax benefit. All they need is an IRA.

The QCD rule allows taxpayers to make IRA distributions directly to a qualified charity without treating those distributions as taxable income. In this way, the QCD amount is never counted as taxable income on your tax return and your adjusted gross income never increases.

How much a taxpayer can benefit from this tactic, depends on the individual taxpayer. Required Minimum Distribution amounts are calculated based on IRS tables. The percentage from the table varies with age and is applied against the taxpayer’s total IRA balance at the end of the preceding year.

QCDs are easy to execute, and there is no minimum amount. There is, however, a $100,000 limit per taxpayer, per year. A qualified charitable distribution is one that is made

  • on or after the IRA owner attained age 70½
  • directly by the IRA trustee to a charitable organization or a donor advised fund. Also, to be excludable from gross income, the distribution must be otherwise entirely deductible as a charitable contribution deduction under without regard to the regular charitable deduction percentage limits.

The QCD rule allows taxpayers to make IRA distributions directly to a qualified charity without treating those distributions as taxable income. In this way, the QCD amount is never counted as taxable income on your tax return and your adjusted gross income never increases. Read on to learn more.

Taxpayers must take their first required minimum distribution from their traditional IRAs in the year they turn 70 ½.  However, the first payment can be delayed until April 1 of the year following the year they reach age 70½. Failure to take the required minimum deduction can lead to penalties equal to 50 percent of the excess of the amount that should have been withdrawn over the amount actually withdrawn. If the first distribution is postponed, two distributions will be required in the first distribution of year-one by April 1 and the other by Dec. 31.

QCDs can’t be claimed as a deduction on the taxpayer’s return and aren’t subject to the general percentage limitations that apply for making charitable contributions. However, QCDs are considered when determining one’s annual required minimum distribution. To be excluded from gross income, the distribution must be entirely deductible as a charitable contribution deduction without regard to the regular philanthropic deduction percentage limits.

December 10, 2019 2:57 pm

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