New life for IRA qualified charitable distributions
Introduced by the Pension Protection Act of 2006, P.L. 109-280, the qualified charitable distribution (QCD) provisions under Sec. 408(d)(8) were repeatedly extended, sometimes retroactively, until they were made permanent by the Protecting Americans From Tax Hikes Act of 2015 (part of the Consolidated Appropriations Act, 2016, P.L. 114-113). Before 2018, the QCD’s strategic importance lay primarily in the fact that it could help older taxpayers meet their philanthropic goals while also satisfying individual retirement account (IRA) required minimum distributions (RMDs).
Since the passage of P.L. 115-97, known as the Tax Cuts and Jobs Act of 2017 (TCJA), QCDs can offer an additional benefit. For tax years 2018 through 2025, the TCJA nearly doubles the standard deduction (for 2018, to $24,000 for married couples filing jointly, $18,000 for heads of household, and $12,000 for all other individuals, indexed for inflation in subsequent years) and caps the itemized deduction for state and local taxes (SALT) at $10,000 annually. Thus, many taxpayers who previously itemized deductions will now find it advantageous to take the standard deduction instead. These taxpayers will no longer deduct their charitable contributions, but via a QCD, some of them can still make those contributions with pretax dollars, resulting in significant tax savings.
Example: For the 2018 tax year, a couple plan to file jointly. They are both age 75 and anticipate adjusted gross income (AGI) of $125,000, including $60,000 in RMDs. Although they will not itemize deductions, they still plan to make charitable contributions totaling $5,000. They will report federal taxable income of $98,400 ($125,000 AGI, less a standard deduction of $26,600 ($24,000 plus an additional standard deduction of $1,300 each for being over 65)), resulting in federal tax of $13,527.
If the couple instead make the charitable contributions using QCDs, they will include the $5,000 in their RMDs but exclude it from gross income, resulting in taxable income of $93,400 and federal tax of $12,427, a tax savings of $1,100.
The QCD requirements are found in Sec. 408(d)(8):
The following factors should also be taken into account when determining whether to make a QCD:
CPAs’ tax clients who have long been accustomed to itemizing their deductions including charitable contributions may be dismayed that their philanthropy no longer is specifically taken into account at tax time, now subsumed under the higher standard deduction and limited SALT deduction. For those who are of the right age and have one or more IRAs, a QCD may be the answer to fulfilling their impulses to be both charity-generous and tax-thrifty.
Kim T. Mollberg, CPA, CGMA, CMA, MBT, is an associate professor of accounting at Minnesota State University Moorhead in Moorhead, Minn.
To comment on this article or to suggest an idea for another article, contact Paul Bonner, a JofA senior editor, at Paul.Bonner@aicpa-cima.com or 919-402-4434.
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