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| Pathways Advisory Group, Inc. Dustin J. Smith, CFP® |
As many of you know, you are required to take taxable distributions
from your Traditional IRA once you attain the age of 70½. Those of you that have experienced this
firsthand likely experienced a subsequent uptick in state and federal tax due. However, as touched on in 2016, donating these required Traditional IRA distributions
directly to a charity (otherwise known as a Qualified Charitable Distribution (or
QCD) can help mitigate this uptick in taxation.
Why revisit QCDs now?
The Tax Cuts and Jobs Act (enacted late last
year) made them more attractive. The
fact that taxpayers can take the greater of their itemized deductions or the standard deduction
has not changed, but a near doubling of the standard deduction (along with the end of miscellaneous
deductions and a new limit for state and local taxes of $10,000), means that more
taxpayers will take the standard deduction in the future.
How will more standard deduction taxpayers make QCDs more attractive?
Charitable giving has been one
of the more popular itemized deductions in the tax code. Once Standard Deduction taxpayers realize
there is no longer a material tax benefit from their itemized giving, they will
look for alternatives.
If you take the
standard deduction and also happen to have a required Traditional IRA
distribution, donating the required distribution (or any portion of it)
directly to a charity (instead of writing a check yourself) effectively makes
the contribution deductible again.
How do QCDs work again?
Required Traditional IRA distributions, up to
$100,000, can be given directly to a qualified charity without incurring any
tax due. It’s tax-free money to the
charity and a non-taxable distribution for the taxpayer, yet still satisfies the
taxpayer’s distribution requirement (or a portion of it). Although it’s not technically
reported as a deduction, avoiding taxation on the required distribution is
effectively the same thing.
QCDs have
been around since 2006 but they will be much more prevalent now. For standard deduction taxpayers with required
distributions from a Traditional IRA, it’s time to consider switching all charitable
giving to direct gifts from a Traditional IRA.
Dustin J. Smith, CFP®
The above explanation
is summarized. It is not all inclusive. Please confirm all specifics with your
tax professional. For a more detailed summary of the 2018 Tax Laws alluded to
above take a look at this post from January.
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